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Comparison between Cash based and Accrual based accounting system


There are two major types of accounting system
  1. Cash based accounting
  2. Accrual based accounting


In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not. In other words, using accrual basis accounting, you record both revenues and expenses when they occur.
The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced).

So, for example, if in a given period you collect little or no receivables and you pay lots of bills, under the cash-accounting method, you have expense without income — you've lost money. On the other hand, if you collect a lot of money and don't pay your bills, you have big income. That's a major distortion of what actually occurred. Accrual-based accounting doesn't care whether you've collected or paid your bills. Income (received or not) is matched to an expense (paid or not), resulting in a proper match of revenue, with the expense generated to produce the revenue. This provides a truer picture of operations.

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