Differentiate cash accounting and accrual accounting.

Banking & FinanceManagementCompanies/Organisations

The major differences between cash accounting and accrual accounting are as follows −

Cash accounting

  • Revenue and expenses are recognized when it’s made through cash only.

  • Simple and intuitive.

  • Not recognized by GAAP.

  • No holistic approach.

  • Tax are not paid for money yet to receive.

  • Mostly used by small business or sole proprietors.

  • Focus on liquidity.

  • Not more accurate.

  • Helps to estimate how much cash is generated.

Accrual accounting

  • All expenses and revenue are recognized.

  • It is complex and difficult to understand.

  • Recognised by GAAP and companies act.

  • Holistic approach.

  • Tax paid on paid for money yet to receive.

  • Mostly used by business having high revenues.

  • Focus on revenue/expenses/profit/loss.

  • More accurate.

  • Helps to estimate how much loss or profit occurred in a period.

raja
Published on 24-Jul-2020 10:36:12
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