What is the difference between cash basis and accural basis accounting?

Why do accrual-basis financial statements provide more useful information then cash-basis financial statements? Describe when each method (cash basis and accrual basis accounting) would be appropriate to use.|||Accrual basis financial statements do a better job of matching revenues with expenses for a particular time period. The income includes sales for which you have done the work haven't yet been paid (your receivables) and the expenses include expenses incurred for the the period that you have not yet paid (payables). It gives a more accurate picture of the actually costs and revenues associated with the time period you are looking at because with cash basis it would be skewed by when the cash was received or paid out. Example: You could have done a lot of business in year one but if you don't receive the cash until year two it may look like year one was not successful as it really was.





Cash basis is good for someone who doesn't carry a lot in receivables, like when payment is made at the time of the sale, or for a business that is very seasonal and for people who don't need much out of their financial statements other than to have them for tax purposes.





A few articles for you:


http://www.dirjournal.com/business-journ鈥?/a>


http://www.allbusiness.com/accounting-re鈥?/a>


http://www.inc.com/articles/2000/04/1919鈥?/a>





|||for the cash basis you recognize the income or expense when you either pay or receive the money.





For accrual basis you recognize income either when the expense has incurred or you have earned to the income. For example, you have used utilities for the month but still have not received the bill for it. You would report on your financial statements that expense even though you have no received the bill. You would estimate the amount based on prior years. Also, sometimes you may perform a service but not get paid until months later. You would recognize that income as soon as you earn it, even though you have not physically received it. |||You wouldn't happen to be doing an Accounting Assignment/ Project now would you?





Cash Basis:





Revenues recorded when Cash is received.





Expenses recorded when Cash is payment.





Cash basis is useful when you are a private company (normally Small business) who's owners and creditors want simple to understand financial statements. Cash basis therefore, is appropriate to use when a company's creditors and owners don't really care about the theoretical accuracy of the statements but instead want to access financial information that are quickly understood.





Accrual Statements:





Revenue is recorded when it is earned, can be measured, and they are certain it can be collected (or they can estimate a reasonable amount for potential losses).





Expenses are recorded when:


1) Incurred


2) Can be tied to revenue (can be as simple as doing it on one years revenues or could be based on a performance measure or based on a passage of time)


3) Can be measured reasonably and we are certain they we will incur them





Accrued (GAAP) Statements have to be used for all public company's in both the US and Canada (they have to prepare financial statements according to US and Canadian GAAP (Generally accepted accounting principles)). However for public companies they may or may not follow accruing expenses and revenues to the letter (as there are accepted practices under GAAP where they can avoid using accrued accounting). In addition it is not uncommon for private companies to use accrued statements (GAAP Statements) in order to get loans from financial institutions (like banks) as well as the use of the same statements in order to get a better long term picture of a companies direction. So accrued accounting is necessary for public companies and can be acceptable for private companies (that want to focus more on long term goals)|||kash=kash


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