Differences between Cash Accounting and Accrual Accounting

Book Keeping  - 5 marks question asked in 1988 & 2015

Differences between

Item	Cash Accounting	Accrual Accounting
1. Basis	Cash is the basis for recognition of Income or expense. That means actual cash received or paid is the basis.	Revenue earned for income and expense incurred is the basis.  That means Cash received or paid is immaterial
2. Nature	Simple	Complex
3. Matching concept	No.  Example : Advance Rs. one Lakh received in 2018 December, for which service is not delivered in FY 2018-19.  But Rs. One lakh is accounted in Fy 2018-19 as income only, though service is not rendered.  That means Income received, but corresponding expense is not incurred in that particular year. Hence No matching concept.	Yes.  Advance Rs. one Lakh received in 2018 December, for which service is not delivered in FY 2018-19.  Here Rs. One lakh is accounted in Fy 2018-19 as Creditor/Advance income only .  If service delivers in FY 2019-20, advance income shown in 2018-19 FY is adjusted as income earned in the year FY 2019-20.  Because service delivered and income earned are matched in FY 2019-20.
4. Recognition of Revenue	Cash is received	Revenue is earned
5. Recognition of Expense	Cash is paid	Expense is incurred
6. Accuracy	Low	High
7. Suitable for	Not for profit / Govt / Charitable organisations	Business/ Commercial organisations
8. Recognised by Govt	Not by Companies Act, 2013	By Companies Act, 2013
9. Focus on	Liquidity	Profit and Loss
10. Treatment of Prepaid expenses	Charged to current year profits	Recorded as Assets in Balance Sheet
11. Treatment of outstanding expenses	Not recorded	Recorded in Debit side of  Profit and Loss Account and Liabilities side of Balance Sheet
12. Recording of Credit Purchases and Credit Sales	No	Yes

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