Accrual vs Cash Accounting | Answers

Revenue recorded when customer pays
➧ Cash Basis

Wages for March recorded even if paid in April
➧ Accrual Basis

No entry until cash is received
➧ Cash Basis

Sale recorded today even if money comes later
➧ Accrual Basis

Expense recorded because utilities were used
➧ Accrual Basis

Transaction
Sold services worth $800 on credit.

Transaction
Paid rent of $500 for last month

Earned service revenue $1,000 on credit
Dr Accounts Receivable 1,000
Cr Service Revenue 1,000

Received $1,000 cash from customer later
Dr Cash 1,000
Cr Accounts Receivable 1,000

Electricity bill of $300 received but not paid yet
Dr Electricity Expense 300
Cr Accounts Payable 300

Small shop owner prefers simple recording
➛ Cash Basis

Listed company preparing financial statements
➛ Accrual Basis

Requires receivables and payables tracking
➛ Accrual Basis

Used mainly for tax reporting for micro traders
➛ Cash Basis

Better measurement of business performance
➛ Accrual Basis

Photography company example

Revenue earned in December
Payment received in January
Electricity expense incurred in December, paid January

Questions

Under Cash Basis
When will revenue be recorded?
➧ Revenue recorded January

When will expense be recorded?
➧ Expense recorded January

Under Accrual Basis
When will revenue be recorded?
➧ Revenue recorded December

When will expense be recorded?
➧ Expense recorded December

Which method reflects December profit more accurately? Why?

Accrual Basis, because it matches income and expenses to the month they occurred.

Under cash basis, when is revenue recorded?
➧ When cash is received.

Under accrual basis, why do we use matching principle?
➧ To match expenses to the revenue they help generate.

Accrual accounting records revenue only when cash is received.
➧ False.

Which method uses receivables and payables?
➧ Accrual Basis.

Which accounting frameworks require accrual accounting?
➧ GAAP and IFRS.

---

Adjusting Entries | Part 1 ➧ Here