Cash & Accrual Accounting

Accounting is identifying, recording, and communicating information that is relevant, reliable and comparable. A main part of this process is the recording or book keeping phase.

The methods in which transactions in any company are recorded, are divided into two, the Cash-basis Accounting and the Accrual Accounting method. The main difference between the two methods is how and when revenue and expenses are recorded.

Cash- Basis Accounting:

This method mainly records revenue when cash is actually received not when it is earned, same applies for expenses, these are also recorded only when cash is paid. Cash transfer could be in any form, example checks, electronic transfer, credit cards etc. This method is appropriate for small businesses which do not need to publish their income statement or other financial statements.

Advantages of Cash Accounting:

1. It is a single entry approach which needs no financial or accounting background.

2. Simple and makes tracking money paid and received very easy.

3. Taxes are not paid on money that is not yet received since it is not recorded.

Disadvantages of Cash Accounting:

1. This method is not a Generally Accepted Accounting Principle (GAAP).

2. Dates of purchases cannot be tracked. Since transactions are recorded only when money passes hand.

3. There’s no record for accounts receivables and account payables, which makes it difficult to track due payments.

4. Inventory is recorded as expenses without stating what is sold by the end of the current period.

5. Does not give a real view of profit, since at a certain period profits can go up due to unpaid expenses, and on the other hand it could show less profit or even loss due to paying such expenses.

6. If an expensive asset is bought it’s recorded at the time of payment, even though it will last for a couple of years. This will affect the income of the year of purchase negatively.

7. Doesn’t have an error checking system since it’s a...