How is cash-basis accounting different from accrual-basis accounting?

Cash-basis accounting is very different from accrual-basis accounting. One major difference is when the business records revenues and expenses. Cash accounting is used more by very small businesses. These businesses recognize revenues when the business receives cash and recognizes expenses when cash is paid out. In accrual-basis accounting revenues are recognized in the period the revenue is earned or accrued. The expenses are matched to the period in which they help to generate the revenue earned or the expense is actually accrued. Kimmel in his book Financial Accounting Tools for Business Decision Making explains accrued revenues as, “revenues earned but not yet recorded at the statement date” (Kimmel, 2011). He goes on to explain that, “An adjusting entry for accrued revenues results in an increase (a debit_ to an asset account and an increase (a credit) to a revenue account” (Kimmel, 2011). Accrual accounting principles are Generally Accepted Accounting Principal (GAAP). Accrual-basis accounting is the way most U.S businesses record the economic events of the company.

Kimmel, P., Weygandt, J. & Kieso, D. (2011). Financial accounting tools for business decision making. Danvers, MA: John Wiley & Sons, Inc.