Share
Explore BrainMass

Cash basis versus accrual basis of accounting

I am not very accounting literate and I am not understanding how to answer & complete this exercise as I am still trying to grasp an understanding of the material. I came across these questions at the end of the chapter:

Regarding the different basis of accounting: When would you use the Cash basis? Accrual basis? Tax basis?

Which one do you think is best for a large Corporation when it issues its Annual Report to the public? Why?

Solution Preview

Hi there,

Here are your answers:

Cash basis accounting is:
- a form of bookkeeping that tracks financial events based on cash flows and cash position.
- revenue is counted when cash is received and expense is counted when cash is paid out.
- payables, receivables and prepaid/accrued expenses are not recognized.
- it is most appropriate to be used by individuals or small private organizations and when the time frame between the exchange of cash and the actual initiation of the transaction is minimal.

Cash-basis accounting is usually unacceptable for entities that are required to make their financial statements available to the public. ...

Solution Summary

Cash basis accounting is:
- a form of bookkeeping that tracks financial events based on cash flows and cash position.
- revenue is counted when cash is received and expense is counted when cash is paid out.

Accrual-basis accounting:
- tracks financial events based on economic as opposed to financial activity.
- revenue is counted in the fiscal period that its earned and realized, whether or not there was receipt of payment.

$2.19