1. What is the difference between cash basis and accrual basis accounting?

In accrual basis accounting, income is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not. In other words, using accrual basis accounting, you record both revenues and expenses when they occur. Accrual Basis Accounting Versus Cash Basis Accounting The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced). Accrual basis accounting is the method of accounting most businesses and professionals are required to use by law. 2. Why do accrual basis financial statements provide more useful information than cash basis financial statements? The result of accrual accounting are income statement that better measures the profitability of a company during a specific time period; and a balance sheet that better shows the financial condition of the company. Accrual basis financial statements do a better job of matching revenues with expenses for a particular time period. The income includes sales for which you have done the work haven't yet been paid (your receivables) and the expenses include expenses incurred for the period that you have not yet paid (payables). It gives a more accurate picture of the actually costs and revenues associated with the time period you are looking at because with cash basis it would be skewed by when the cash was received or paid out. 3. Describe when each method (cash basis and accrual basis accounting) would be appropriate to use. Cash basis is good for someone who doesn't carry a lot in receivables, like when payment is made at the time of the sale, or for a business that is very seasonal and for people who don't need much out of their financial statements other than to have them for tax purposes.