Cash and Accrual Basis of Accounting.

Running head: CASH AND ACCRUAL BASIS OF ACCOUNTING
Cash and Accrual Basis of Accounting
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CASH AND ACCRUAL BASIS OF ACCOUNTING
Cash and accrual basis of accounting
Advantages and disadvantages of cash basis of accounting.
The cash basis of accounting is a process in which sales are recorded at the time of
receipt of the sales amount and the expenses are recorded at the time of actual payment is
made. The cash basis of accenting is simple and reduces the time in recording the transactions
in the books of accounts. The major advantages and disadvantages of the cash basis is stated
below
Advantages of cash basis
 The cash basis is very helpful for tax purposes as it ensures that tax is not required to
be paid on the amount which is still not received by the organisation.
 It is useful for the small business enterprises in which cash flow can be restricted at
certain times.
 For enterprises that has to deal with large volume of cash transactions and does not
require to maintain huge volume of inventories for such enterprises cash accounting is
an easy and effective method.
 Under the cash basis method, it is comparatively easy to maintain and record the
accounting transactions even for a layman who dose not have sufficient knowledge
about accounting.
Disadvantages of cash accounting
 It is difficult to track the actual dates of sales and purchases as it used to record the
transaction on the date of receiving the payment or paying the expenses and not the
date on which such transactions actually happened.

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CASH AND ACCRUAL BASIS OF ACCOUNTING
 Under the cash basis it is not possible to maintain any accounts receivable or accounts
payable accounts for which it is not possible to track which invoices are still pending
for payment or which invoices are required to be collected from the debtors.
 As the partial payments are not recorded in a cash basis method of accounting so the
amount of money which is due to be paid or collected cannot be reflected in the
balance sheet and for that reason the financial statement will not be give the true and
fair view of the financial position of an organisation.
 As under this method non cash items are not recorded in the books of accounts it may
be possible that the company fail to collect the payments that are due from the clients
and if the suppliers claim that certain amount is not paid by the company then in that
case the organisation will not be able to provide any supporting document that can
prove that the claim of the suppliers are not justified.
Accrual basis of accounting
Accrual accounting is a process of maintaining the books of accounts on the basis of
the concept that a transaction will be recorded in the books when such transaction actually
happened and not when the payment paid to suppliers or received from the customers. This is
the most scientific method of recording the financial transactions. The accrual method
ensures that all the transactions are recorded correctly on time and that the financial
statements give a true and fair view of the financial position of the company (Bonus 2019).
Advantages of the accrual method of accounting
Gives the actual position of the overall cash flow of the organisation