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

Why do accrual basis financial statements provide more useful information than cash basis financial statements?





when would each method be appropriate to use?

What is the difference between cash basis and accrual basis accounting?
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Reply:Simple. Cash basis is when a transaction is recorded when cash changes hands. When you buy an item for your business (say office supplies), you record the transaction when you pay for those office supplies.





Accrual basis is when a transaction is recorded when the transaction takes place. In the above example you would record the transaction for office supplies when you purchased them, even if you did not pay for them at that time.





The difference between the two systems is the timeing of the recording of the transactions.





The accrual basis financial statements show all transaction that have taken place. On the cash basis financial statements only those transactions that cash has exchanged hands will be recorded. So if I want to show good results on a cash basis financial statement I just don't pay the bill. I don't show the bills being owed or the expenses being made.
Reply:This sounds like a school homework question, but I'll give you a quick starting point.





I am not an accountant, but I ran a business and had a business minor in college.





Basically cash basis means you report the cash in the fiscal year you acquired it. It doesn't matter if someone PROMISED it (by way of signing a contract or something), it only counts when it was given to you.





Alternatively you can report stuff as to when the money was "booked" - not that you've received it, but that you have a more or less official commitment to it. It could be orders from distributors, or other customers, whatever.





Depending on the nature of your business, one may be more appropriate than the other. For instance, if you have a lot of up-front expenses that go with those orders, you might want to be on a non-cash basis, so you can offset those costs against something. Otherwise you show a huge loss one year (when you make the deals, but spend the money) and a huge profit the next (when you get the money, but have already spent the up-front costs the year before). The non-cash basis lets you even it out.





Note that you can't pick and choose from year to year - you have to pick one basis and stick with it. You can change, but you need to have a good reason. The IRS will go with an occasional change, but I doubt they'll go with one every year.





Or, you could open lots of "sub-companies" to get around it; I'm sure people are doing it.





But in general, you pick the accounting method that's most appropriate to your business. As a rule, you want to pair your expenses with your profits. Sometimes that works best with a cash basis, sometimes it works best with a non-cash basis.
Reply:In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not. In other words, using accrual basis accounting, you record both revenues and expenses when they occur.





The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced).





Accrual basis accounting is the method of accounting most businesses and professionals are required to use by law. Accrual basis accounting gives the most accurate picture of the financial state of a business.