Accrual vs Cash Accounting

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ACCRUAL VS CASH ACCOUNTING
Accruals based accounting recognises revenue as it is earned, and the expenses are recorded in the accounts when they have been incurred. Even if the business has not received any cash or in return has not paid any cash then the revenue or expense may still be recorded. The majority of businesses use the accruals basis for their accounting. Cash basis accounting, however, is where the records follow the movement of cash. For cash based accounting, the revenue will only be recognised when the cash has been received by the business. And likewise the expenses will be recorded when the cash actually leaves the business for a payment to be made. Cash basis method is mostly in practice with smaller businesses. The key differentiation between accrual basis accounting and cash basis accounting relates in the timing of when revenue and expenses are recognised. A high proportion of businesses prefer to use accrual based accounting because the revenue and expenses are matched more precisely to the time period in which they occur.
This video will help you with questions such as accrual versus cash accounting, what is better accrual or cash accounting, what is the main difference between the cash and accrual basis of accounting, do most companies use cash or accrual, what are the pros and cons of cash vs accrual accounting, accrual vs cash accounting examples, accrual accounting, why is the accrual basis of accounting generally preferred over the cash basis, cash basis accounting, cash vs accrual in accounting, cash basis accounting example, cash basis vs accrual basis accounting.
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DISCLAIMER
Our content is to be used as an EDUCATIONAL TOOL that aims to provide a foundation for individuals to learn financial accounting, management accounting and bookkeeping topics as practiced in the United Kingdom. As a result, not all complexities are shown or provided. Examples may include but are not limited to; differences between financial reporting, accounting standards or tax treatments. We are NOT ENGAGED in the providing of accounting, bookkeeping, financial, investment, tax, or other professional services. You should consult with a qualified or professional such as an accountant, business advisor, investment specialist, lawyer, solicitor, etc., with regards to specific facts and situations.
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24 сен 2024

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@manuvj915 6 лет назад

On accrual basis if cash is paid in full in one year how it be recorded and should it be recorded with remaining accounting time period ?

@TheAccountingStudent 6 лет назад

Hello Manu, if we are creating the end of year financial statements and if the cash has been paid in full within the accounting year then no accrual will be made. However let's show you an example when only part is paid during the year and what you will have to do when closing for the end of year. Let's say a mechanic called Mike rents a garage to repair customers cars and bikes. At the start of 2018, it was agreed between Mike and the landlord of the garage that the rent for the year would be £24,000. Now we go to the end of the year and the accounts for 2018 have been closed, Mike has only paid the landlord £20,000. How will this be recorded? For accrual accounting. The amounts in the accounts should be precise to the time period of those accounts. So in the rent account the amounts paid of £20,000 will be shown on the debit side. Because we are following accrual accounting principle the whole rent amount of £24,000 has to be included in the accounts so the total amount related to the period of £24,000 is entered as a credit in the rent account and it is also posted to the profit and loss account as a debit because it is an expense. The balance of £4,000 which has not been paid (i.e. the accrual) will be added to the rent account on the debit side and carried down to the credit side of the rent account into the next period to show that the £4,000 is still outstanding as an accrual. On the other hand, for cash accounting. The amount in the accounts follow the movements in cash. Therefore the amount recorded in the accounts for the rent will be £20,000 for the whole year which is debited on the rent account and at the end of the year credited on the rent account and debited to the profit and loss as an expense.