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Cash and Accrual Basis of Accounting Video Lecture - Commerce
FAQs on Cash and Accrual Basis of Accounting Video Lecture - Commerce
| 1. What is the difference between cash basis and accrual basis of accounting? |  |
Ans. The cash basis of accounting records transactions when cash is received or paid, while the accrual basis records transactions when they occur, regardless of when cash is exchanged. The cash basis focuses on cash inflows and outflows, while the accrual basis focuses on recognizing revenues and expenses when they are earned or incurred.
| 2. Which basis of accounting is more commonly used by small businesses? | |
Ans. Small businesses often use the cash basis of accounting because it is simpler and easier to understand. It does not require tracking accounts receivable or accounts payable, making it suitable for businesses with straightforward transactions and cash flow.
| 3. Are there any disadvantages to using the cash basis of accounting? | |
Ans. Yes, there are some disadvantages to using the cash basis of accounting. It may not provide an accurate picture of a business's financial health, as it does not consider accounts receivable or accounts payable. It can also result in distorted financial statements, especially if there are significant timing differences between cash receipts and expenses.
| 4. When is the accrual basis of accounting more appropriate to use? | |
Ans. The accrual basis of accounting is more appropriate when a business wants to accurately match revenues and expenses to the period in which they occur. It provides a more comprehensive and accurate representation of a business's financial position and performance, especially for businesses that have significant accounts receivable, accounts payable, or inventory.
| 5. Can a business switch from cash basis to accrual basis of accounting? | |
Ans. Yes, a business can switch from the cash basis to the accrual basis of accounting. However, it requires careful consideration and planning. The switch may require adjustments to financial records, systems, and reporting. It is recommended to consult with an accountant or financial professional to ensure a smooth transition and compliance with accounting standards.
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Dec 23, 2024 Last updated |
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