Cash vs Accrual Accounting

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Questions and Answers

Which method of accounting records revenue when cash is received and recognizes expenses when they are paid?

Cash basis accounting (correct)
Accrual basis accounting
Single-entry accounting
Double-entry accounting

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

The time frame in which revenues and expenses are reported (correct)
The financial position of the enterprise
The method of recording revenue and expenses
The complexity of transactions

When is the accrual basis of accounting used?

When the entity wants to manipulate financial statements
When the entity has numerous and complex transactions (correct)
When the entity has simple transactions
When the entity wants to avoid taxes

Why is the accrual basis of accounting commonly used by businesses?

<p>It is suggested by the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) (D)</p> Signup and view all the answers

What does the accrual basis of accounting depict?

<p>The real performance and financial position of the enterprise (B)</p> Signup and view all the answers

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Study Notes

Accounting Methods

The cash basis of accounting records revenue when cash is received and recognizes expenses when they are paid.

Cash vs. Accrual Basis of Accounting

The primary difference between cash and accrual basis of accounting lies in the timing of revenue and expense recognition.

Accrual Basis of Accounting

This method is used when there is a significant delay between the time of sale and the time of payment, or when there are significant amounts of inventory, supplies, or services sold on credit.
It is commonly used by businesses because it provides a more accurate picture of a company's financial performance, as it matches revenues with the expenses incurred to generate those revenues.
The accrual basis of accounting depicts the company's financial situation more accurately, as it takes into account expected revenues and expenses, rather than just cash inflows and outflows.