Cash basis and accrual basis accounting are the different accounting methods that are used to record information about transactions and other accounting activities. The primary difference that exists between the two accounting methods is the differentiation in the timings of actual information recording and record of the transactions. However, the two approaches generate approximately the same results when they are aggregated over time. In cash basis, when the cash is received from the customer, the revenue is recorded immediately while the expenses are recorded at the time when the money in terms of cash is given to the employees and the suppliers. In the case of Accrual basis accounting, expenses are recorded at the time of consumption and the revenue is recorded when it is already earned. (Kaplan & Atkinson, 2015).
The difference in timing appears because of the revenue recognition, which is delayed in the case of cash basis since the accounting transactions only takes place when the customer is physically present in the company to make transactions. In the same sense, the recognition of the expenses in the cash basis is delayed until the time that the invoice of the supplier is paid. The information or the receipt derived from the methods of accounting is usually the same despite the time in which the recordings are done.
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The accrual basis method of accounting appears to be the best accounting method among the two in various ways. One is that it overrides the cash basis, especially when the company, the business owner is majorly interested in understanding the general performances of the business during a specific period, say financial seasons. With the accrual accounting method, both expenses due to the goods and services and the revenue are matched together under one sheet. Therefore, it becomes easier for the assessor to determine the trends and movements of goods at a specified period.
The revenues are recorded along the time when the good and the services are completed while all the expenses will be put into records during the periods when the goods and services are bought or purchased. The accrual method of accounting provides a good snap of the performances of the business over a given period. (Lapsley et al., 2009)
A good scenario of the significance of this method of accounting is when the business bills the clients in terms of credits and then it records the income statement in the same period when the goods and services are entirely completed. If the business buys its goods on credit, the expenses are recorded on its income statement in the very same period when the goods and services transaction is completed. In this way, the business owners or the company will show how the company for the business has performed accurately. (Waynne, 2007)
It will also show how much revenue was collected at a particular time and how much expenses were used during a specific time of interest. Much more information concerning the expenses and revenues are evident with the Accrual Accounting, including the margin analysis such as gross margin analysis, profit margin and operating margin. It provides more accurate and reliable data about every aspect of accounting.
With cash basis accounting, the company's cash flows are provided. If the business bills its clients in terms of credit, it records its revenue at the moment cash is received. If a carpenter sales furniture on credit and sells a chair in April but does not get the money till July, the revenue of the goods delivered in April is recorded as if it were delivered in July. However, it will be considered a better method when the company is focused on capital
References
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting . PHI Learning.
Lapsley, I., Mussari, R., & Paulsson, G. (2009). On the adoption of accrual accounting in the public sector: a self-evident and problematic reform.
Wynne, A. (2007). Is the move to accrual based accounting a real priority for public sector accounting? Public Fund Digest , 6(1), 25-39.
