Accrual Basis vs. Cash Basis Accounting
The difference between accrual basis vs. cash basis accounting is that “ accrual basis
shows that most larger companies uses this to record transactions in the periods in which
events occur, making it to determine the net income when companies recognize revenues
earned, rather than receiving cash and expenses when incurred than paid” (Weygandt,
2008). With the “cash basis this is used for smaller companies when they record revenue
after they receive the cash and pay out cash, that can be tremendously misleading for the
financial statements” (Weygandt, 2008).
The “accrual basis is accepted by the GAAP because it show how well the larger
companies financial status is doing, to where the cash basis is not accepted by the
GAAP, because the revenue is not being recorded in which the cash it not being
received” (Weygandt, 2008).
The next reason is to “why the politicians prefer the cash basis over the accrual
basis is that the politicians like a more consistent rate than one that will fluctuate
all the time, as it works well within the government to be easy to calculate value
for tax purposes” (Weygandt, 2008) The “accrual basis will ask for a higher tax
rate from the government in larger companies, so this make the politicians feel
safe with wanting to use the cash basis over the accrual basis” (Weygandt, 2008).
Reference: Weygandt, Jerry J., Kimmel, Paul D., & Kieso, Donald E. (2008). “Financial
Accounting” (6th ed.). Hoboken, NJ: Wiley. Retrieved October 21, 2009 from ebook
of University of Phoenix.