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Cash vs. Accrual Basis of Accounting

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Commercial accounting and generally accepted accounting principles generally prescribe the accrual basis of accounting over the cash basis. Describe both bases of accounting and explain the differences.

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Solution Summary

This solution compares and contrasts the accrual basis of accounting with the cash basis of accounting and describes the advantages and disadvantages of both accounting styles. Additionally, the solution includes two reference source for further investigation of the topic.

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In the accrual basis of accounting, the income is reported as soon as it is earned and expenses will be reported as soon as they are incurred. In accrual basis, the company has the discretion of when the income and expense can be recognized. Revenue is recognized when the revenue is earned and the revenue is realized or realizable. Likewise, expense is recognized when the related revenue is recognized.

In the cash basis of accounting, the income is reported when the cash is actually received and the expenses will be reported when they are actually paid.

Accrual accounting enhances the usefulness of financial statements. For example, if the rent for the ...

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