Describe the primary differences between the cash basis and accrual basis of accounting. Which accounting method provides more useful information on the financial statements? Additionally, provide an example of a revenue or expense transaction under each methodology that supports your position.

The primary difference between the cash basis and accural basis of accounting is in the timing of recording of transactions i.e. recording of sales and purchase

The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. This method does not recognize accounts receivable or accounts payable.The cash method is also beneficial in terms of checking on how much cash the business actually has at any given time; you can look at your bank balance and understand the exact resources at your disposal.

Accrual accounting is a method of accounting where revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. For example, you would record revenue when a project is complete, rather than when you get paid. This method is more commonly used than the cash method.

In terms of providing useful information accural method provides more useful information on the financial as accural method leads to recording of transaction whether of sales or purchase or expenses when they are actually incurred which leads to more reflection of useful information by the financial statements.

Example

accural method - insurance taken on motor car amounting 34000 . But payment not made

Insurance expense a/c Dr 34000

To insurance payable a/c 34000

As inspite of no cash has been paid but still expense has been recorded in book and liability to pay later is also recorded.

cash method??????- insurance taken on motor car amounting 34000 . But payment not made

Hence in this no journal entry will be recorded as no cash has been paid

Suppose amount is paid next year, then transaction will be recorded.

Insurance expenses a/c Dr 34000

To cash a/c 34000