The primary difference between cash basis and accrual basis accounting is with the timing of transaction recordation. With the cash basis, we record revenue when we receive cash from the client, and expenses are recorded when we pay cash to employees or suppliers of goods and services (Klinefelter, McCorkle & Klose, 2008). On the other hand, in accrual basis accounting, the revenue of the organization is recorded when earned, and expenses are only recorded when consumed.
Most large businesses prefer accrual basis accounting because of the following reason. It gives a better picture of the company’s real obligations that include the profits during an accounting period. With the accrual basis, the income statement will provide a report of the revenues earned and the expenses incurred over time. Besides, it provides a fairer picture of the financial position of the company at a point in time (Klinefelter, McCorkle & Klose, 2008). This is because it provides a report of the assets earned and liabilities incurred.
In situations when sales exceed $5 million, companies will use accrual basis for tax reporting. The financial statements of companies will only go through the audit process if companies have used accrual basis accounting to prepare them. With accrual basis, the financial results of the company are more likely to match the revenue and expenses in the same reporting time. Therefore, the true profitability of the organization can be realized.
Klinefelter, D. A., McCorkle, D., & Klose, S. (2008). Financial Management: Cash vs. Accrual Accounting. Texas FARMER Collection.
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