Disadvantages of Cash Basis and Accrual Basis Accounting

Introduction
Accounting is a fundamental aspect of any business that involves recording, summarizing, and analyzing financial transactions. This process helps businesses to keep track of their financial performance and make informed decisions. There are two main methods of accounting: cash basis and accrual basis. However, each method has its advantages and disadvantages.

Disadvantages of Cash Basis Accounting
1. Limited Financial Reporting: Cash basis accounting only records transactions when cash is exchanged. This approach can limit the financial reporting of a business because it does not account for outstanding payments or receipts.

2. Inaccurate Financial Reporting: Because cash basis accounting only recognizes transactions when cash is exchanged, it may not accurately depict the financial health of the business. For example, the business may have significant unpaid invoices or expenses that are not yet due, which can distort the financial statements.

3. Difficulty in Forecasting: Cash basis accounting makes it difficult to forecast future cash flows and make informed financial decisions. This is because it only accounts for transactions when cash is exchanged and does not take into account future receipts or payments.

Disadvantages of Accrual Basis Accounting
1. Complexity: Accrual basis accounting requires a more complex accounting system than cash basis accounting. This is because it requires the tracking of accounts receivable and accounts payable, which can be time-consuming and costly.

2. Delayed Recognition of Revenue: Accrual basis accounting requires the recognition of revenue when it is earned, not when cash is received. This means that revenue may be recognized in a different period than when the cash is received, which can lead to discrepancies in financial reporting.

3. Misleading Financial Reporting: Accrual basis accounting can be misleading in times of financial distress. For example, a business may recognize revenue that is unlikely to be collected or expenses that are unlikely to be paid, which can distort the financial statements.

Conclusion
Both cash basis and accrual basis accounting have their advantages and disadvantages. It is important for businesses to choose the right method of accounting based on their specific needs and circumstances. Businesses should consult with a qualified accountant to determine which method of accounting is best for their business.

Disadvantages of cash basis:-
1.it does not give a true and fair view of of profit and loss and financial position of the Enterprise because it ignore outstanding expenses prepaid expenses accrued income and income received in advance.
2.it does not follow matching principle of accounting.
3.there is the great possibility of manipulation of profit in cash basis of accounting.
4.Companies Act, 2013 does not recognise it.
Disadvantages of Accrual basis:-
1.it is not simple as cash basis of accountancy.
2.it require the use of estimate and personal judgement.