Give a brief definition in your own words of cash base accounting and accrual accounting.
For Cash basis accounting, revenue is recorded when cash is received from customers, and expenses are recorded when cash is paid to suppliers and employees. For Accrual basis, revenue is recorded when earned and expenses are recorded when consumed. The timing difference between the two methods occurs because revenue recognition is delayed under the cash basis until customer payments arrive at the company. Similarly, the recognition of expenses under the cash basis can be delayed until such time as a supplier invoice is paid.
"Cash based accounting recognizes sales and expenses when cash actually flows out of the company. Accrual based accounting recognizes revenues and expenses as they are incurred regardless of cash flows. Accrual based accounting is the more popular method."
"I have only worked at companies that have used accrual accounting, meaning all revenue and expenses are recorded when they are incurred. Cash based accounting is recorded when the cash flows in and out of the business. An example of cash based and accrual accounting on the revenue side is: A company sells $10,000 of green widgets to a customer in March, which pays the invoice in April. Under the cash basis, the seller recognizes the sale in April, when the cash is received. Under the accrual basis, the seller recognizes the sale in March, when it issues the invoice.
An example of cash based and accrual accounting on the expense side is: A company buys $500 of office supplies in May, which it pays for in June. Under the cash basis, the buyer recognizes the purchase in June, when it pays the bill. Under the accrual basis, the buyer recognizes the purchase in May, when it receives the supplier's invoice.
The cash basis is only available for use if a company has no more than $5 million of sales per year (as per the IRS). It is easiest to account for transactions using the cash basis, since no complex accounting transactions such as accruals and deferrals are needed. Given its ease of use, the cash basis is widely used in small businesses. However, the relatively random timing of cash receipts and expenditures means that reported results can vary between unusually high and low profits."