There are two systems or basis of accounting, Accrual Accounting and Cash Basis Accounting. The difference between the two systems of accounting is when revenues and Expenses are recorded in the book of prime entry.
Accrual accounting requires accountants to follow the revenue recognition principle and the expense recognition principle. It is the accounting system in which events are recorded as and when they occur. This means that Revenue is recorded when it is earned and expense is recorded when incurred i.e. the organization has obtained the benefit from it. Consider the example of utility bills like electricity, telephone etc. The bill of January is received on 5th February and paid on 15th February. In accrual accounting, the electricity is utilized in the month of January so the expense should be recorded in the month of January 31st and similarly the treatment of revenue.
- Account Payable and Account Receivable available.
- Cash Basis Accounting does not satisfy the requirements of Generally Accepted Accounting Principles (GAAP), whereas accrual basis of accounting does.
- Accrual basis accounting provides an objective measurement of net income.
>> Read Double Entry Accounting.