Differentiate between Cash-Basis versus Accrual-Basis

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Differentiate the accrual basis of accounting from the cash-basis of accounting.

Determine which method is acceptable for most business enterprises and justify your selection.

Contrast the impact of cash versus accrual accounting on net income of a first year business with substantial sales on account and no liabilities.

Determine which method reflects cash available to the business and justify your findings.

Justify why we use the accrual basis of accounting under GAAP if cash is the real bottom line.
(a)
Under the cash basis of accounting...
1. Revenues are reported on the income statement in the period in which the cash is received from customers.
2. Expenses are reported on the income statement when the cash is paid out.
Under the accrual basis of accounting...
1. Revenues are reported on the income statement when they are earned—which often occurs before the cash is received from the customers.
2. Expenses are reported on the income statement in the period when they occur or when they expire—which is often in a period different from when the payment is ...