Cash Vs Accrual Basis Acc

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It is generally accepted that accrual basis accounting is preferred as compared to cash basis accounting because in order to fulfill the matching principle of revenue against expenses or purchases. However, if the amount is not substantial, some expenses are allowed to capture as and when it is paid.

A good example of accrual basis accounting is purchases, where supplier invoices are entered in the month that the goods were received and paid on a later time (depending on the credit terms), where sales are made on the month that the goods are received (assuming that goods are received and sold in the same month).

 

Similarly, expenses,(Utilities, rental,salary,)must also be reflected in the month as it incurs.

Assuming a worker works for a $1,000 per month in January and paid only on the 2nd day of February.

For a cash basis accounting, February will have $1,000 salary accounts in the Profit & Loss report because a cheque is issued on the 2nd February.

 

Under the accrual basis accounting, expenses can be captured in the Purchase Journal (or accrual journals )  in 31st Jan and payment be made only in February.

 

Related Topics: Purchase Journal