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Difference Between Cash Basis and Accrual Basis and Adjusting Entries

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E2-1 On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially.
(a) What is the difference between accrual-basis accounting and cash-basis accounting?
(b) Why would politicians prefer the cash basis over the accrual basis?
(c) Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting.

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On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially.

(a)What is the difference between accrual-basis accounting and cash-basis accounting?

In accrual accounting, revenues and expenses are recognized in the period they are earned or incurred. The cash may be collected or disbursed later. Thus if a sale is made, it will be recognized as income, even though cash may be colected later. Similarly if a purchase is made, it will be recognized as expense, even though cash may be paid later.

In cash accounting, income and expense are recognized only when cash is paid. So when the cash is colected for a sale made, then it will be recorded and similarly when as expense is paid, it will be recorded not when it has been incurred.

(b) Why would politicians prefer the cash basis over the ...

Solution Summary

The solution explains the difference between cash basis and accrual basis of accounting and why politicians like cash basis in 329 words. This solution provides adjusting entries for E2-4, the trial and adjusted trial balance for E3-5 (with discusses of adjustments) and the adjusting entries for P2-4 (with calculations) in the attached Excel file.

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