Final answer:
Accrual basis accounting recognizes and records revenue and expenses when they are earned or incurred, regardless of when the cash is actually received or paid. Cash basis accounting records revenue and expenses only when cash is received or paid.
Step-by-step explanation:
Accrual Basis Accounting vs Cash Basis Accounting
Accrual basis accounting and cash basis accounting are two different methods used to record financial transactions.
Accrual Basis Accounting
Accrual basis accounting recognizes and records revenue and expenses when they are earned or incurred, regardless of when the cash is actually received or paid. It focuses on matching revenues with expenses to provide a more accurate financial picture of a business.
Cash Basis Accounting
Cash basis accounting records revenue and expenses only when cash is received or paid. It does not consider receivables or payables. This method is simpler and provides a more immediate view of cash inflows and outflows.
Reporting Differences
Accrual basis accounting reports the overall financial performance of a business over a given period of time, including both cash and credit transactions. It provides a more comprehensive view of a business's true financial position.
Cash basis accounting, on the other hand, reports only the cash transactions that have occurred during a certain period. It does not reflect any outstanding payables or receivables, which may result in a distortion of a business's financial position.