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Difference between Cash Basis and Accrual Basis of Accounting

Explain the difference between the cash basis and accrual basis of accounting?
When would you use the cash basis? Accrual basis?
Which one is better? Why?
What experience, if any, have you had with these bases of accounting?

Solution Preview

The major difference between the cash basis and the accrual basis of accounting is reflected by the way each method recognize revenue and expenses.

Under the cash basis of accounting:
Revenues are recognized only when cash is received and expenses are recognized only when cash is spent. For example, if you sell a computer for $500 today but allow a credit term of 30 days (that means your customers can take up to 30 days to pay you). You will not recognize the $500 sale today, but 30 days later when you finally receive that payment from your customer, or never if he decided to not pay you.

Under the accrual basis of accounting:
Revenue is recognized when it is "earned". We have to pay ...

Solution Summary

This solution of 464 words explains the major differences between cash basis and accrual basis of accounting. It defines and explains the methods for both cash basis and accrual basis, and identifies the 'better method and justifies why.

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