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Accounting Textbooks Boundless Accounting Detailed Review of the Income Statement Revenue Recognition
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Accounting
Concept Version 8
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Differences Between Accrual-Basis and Cash-Basis Accounting

Accrual accounting does not record revenues and expenses based on the exchange of cash, while the cash-basis method does.

Learning Objective

  • Differentiate between accrual and cash basis accounting


Key Points

    • Accrual accounting does not consider cash when recording revenue; in most cases, goods must be transferred to the buyer in order to recognize earnings on the sale. An accrual journal entry is made to record the revenue on the transferred goods as long as collection of payment is expected.
    • In accrual accounting, expenses incurred in the same period that revenues are earned are also accrued for with a journal entry. Same as revenues, the recording of the expense is unrelated to the payment of cash.
    • For a seller using the cash method, revenue on the sale is not recognized until payment is collected and expenses are not recorded until cash is paid.
    • The cash model is only acceptable for smaller businesses for which a majority of transactions occur in cash and the use of credit is minimal.

Terms

  • liability

    An obligation, debt or responsibility owed to someone.

  • accrue

    To increase, to augment; to come to by way of increase; to arise or spring as a growth or result; to be added as increase, profit, or damage, especially as the produce of money lent.


Full Text

Definition of Accrual Accounting

Under the accrual accounting method, the receipt of cash is not considered when recording revenue; however, in most cases, goods must be transferred to the buyer in order to recognize earnings on the sale. An accrual journal entry is made to record the revenue on the transferred goods even if payment has not been made. If goods are sold and remain undelivered, the sales transaction is not complete and revenue on the sale has not been earned. In this case, an accrual entry for revenue on the sale is not made until the goods are delivered or are in transit. Expenses incurred in the same period in which revenues are earned are also accrued for with a journal entry. Just like revenues, the recording of the expense is unrelated to the payment of cash. An expense account is debited and a cash or liability account is credited.

Definition of Cash-Basis Accounting

The cash method of accounting recognizes revenue and expenses when cash is exchanged. For a seller using the cash method, revenue on the sale is not recognized until payment is collected. Just like revenues, expenses are recognized and recorded when cash is paid. The Financial Accounting Standards Board (FASB), which dictates accounting standards for most companies—especially publicly traded companies—discourages businesses from using the cash model because revenues and expenses are not properly matched. The cash model is acceptable for smaller businesses for which a majority of transactions occur in cash and the use of credit is minimal. For example, a landscape gardener with clients that pay by cash or check could use the cash method to account for her business' transactions .

A cashier at a hotel in Thailand

The cash-basis method, unlike the accrual method, relies on the receipt and payment of cash to recognize revenues and expenses.

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