Cash Basis v/s Accrual Basis Accounting

Presented by:
Fayiza Parveen ( MS160400745 )
 List of Contents

 Definition
 Comparison Chart
 Key Differences
 Advantages and Disadvantages
 Conclusion
Definitions
Cash Accounting
The type of accounting in which the recognition of revenues and expenses are done only
when there is actual receipt or disbursement of cash takes place. This is the method, in
which the income or expenses are recognised when the inflow or outflow of cash exists in
reality.
Accrual Based Accounting
Under the accrual bases, revenues and expenses are recorded when they are earned,
regardless of when the money is actually received or paid. This method is more commonly
used than the cash method.
 Comparison Chart
BASIS FOR COMPARISON CASH ACCOUNTING ACCRUAL ACCOUNTING

Meaning The accounting method in which The accounting method in which

the income or expense is the income or expense is
recognized only when there is recognized on mercantile basis.
actual inflow or outflow of cash.

Nature Simple Complex

Method Not recognized method as per Recognized method as per

companies act. companies act.

Income statement Income statement shows lower Income statement will show a
income. comparatively higher income.
Recognition of revenue Cash is received Revenue is earned

Recognition of expense Cash is paid Expense is incurred

Degree of Accuracy Low Comparatively high

 Differences between Cash Accounting and Accrual
Accounting

The following are the major differences between cash accounting and accrual accounting:
 In Cash Accounting income or expense is recorded when inflow or out flow of cash is actually done while in
Accrual Accounting, the income or expense is recognised when it arises.
 Cash Accounting is simple as compared to Accrual Accounting.
 Cash basis of accounting is not a recognised method as per companies act, whereas accrual basis of accounting is a
recognised method.
 In Cash accounting, the income statement, shows lower income, while in accrual basis of accounting the income
statement shows relatively higher income.
 The basis of cash accounting is actual receipt and payment of cash. On the other hand, in accrual accounting, the
recognition is done when the revenue or expense occurs.
 The degree of accuracy is more in accrual accounting, which is very less in cash accounting. Cash Accounting is suitable for
sole proprietors or contractors. Conversely, big enterprises should prefer Accrual Accounting.
 Advantages and Disadvantages

 The cash method of accounting is the simplest method and the method that is most
familiar to the majority of people. It also gives you the best picture of how much cash
you truly have available for operating your business. However, it can offer a biased
picture of your profit and loss as expenses and revenue are often recognized in
different periods. For example, suppose you spend $2,000 on June 25 to purchase
products to fill a customer's order. Your customer picks up his order on July 1 and pays
you $3,000. In the unlikely event that you had no other transactions for either month,
your income statement would show a loss of $2,000 in June and a profit of $3,000 in
July.
 The accrual method of accounting does a better job of matching income and expenses
to the appropriate period. This gives you a better picture of your true profit or loss.
However, the accrual method tends to obscure your view of how much operating cash
you actually have available, so you might need to prepare frequent cash flow
statements to get a better picture. The accrual method is also more complicated and
time-consuming
 Conclusion

The gap in the occurrence and recognition of revenue and expense is the main
difference between cash accounting and accrual accounting. The former is generally
used by a small business person, non-profit organisations and government agencies,
etc. while the latter is preferred by the big enterprises because the transactions occur
rapidly. The next difference is that the organisations where the records are kept on
cash basis accounting enjoy tax benefit whereas in accrual system the entity has to
pay tax on the income which is still not collected.