Summary
Summary the accrual basis of accounting vs the cash basis
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the accrual basis of accounting vs the cash basis
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The accrual basis of accounting: The effects of transactions are recognised when they occureven if cash is received or paid in a different period.
Only amounts earned in a period are recognised as income
Only amounts incurred in a period are recognised as an expense
Cash basis compared to accrual basis of accounting
Cash basis:
Factual
Assists investors to understand how an entity receives and uses its cash
May misrepresents the long run cash generating ability of business
Accrual basis:
Income recognised as a measure of accomplishment when earned
Expenses included as measure of effort when incurred
Examples
Accrual basis of accounting example:
Scenario 1:
Legal practice consults with 100 clients for current month at C500 per client.
The practice is operated from rented premises and the rent is C10 000 a month
During the current month they have received an income of C50 000 from clients and
have paid C10 000 for rent in the current month
Cash received from clients 50 000
Cash paid for rents 10 000
CASH BASIS ACCRUAL BASIS ACCRUAL BASIS
Statement of cash flows Statement of profit or loss Statement of financial
position
Cash inflows Income
Fees 50 000 Fees 50 000 No statement of financial
position effect
Cash outflows Expenses
Rent (10 000) Rent (10 000) No statement of financial
position effect
Net cash flow 40 000 Profit for the period 40 000
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