Please I need a correct answer and clear explanation in poin

Please, I need a correct answer and clear explanation in points form. Thanks,

What are the advantages and disadvantages of using the accrual basis of accounting rather than the cash basis?

Solution

Accrual and Cash Basis of Accounting

Accrual and cash basis are the two most popular accounting bases.

Accrual basis is more advantageous and thus more popular than Cash basis.

The main difference between the two accounting bases lies in when they choose to record a transaction. Cash basis accounting only records transactions when cash and cash equivalents are either received or paid out. By contrast, accrual basis accounting records most transactions at the times of their occurrence.

Advantages of Accrual Basis of Accounting

Accrual basis accounting is more popular than cash basis accounting because it produces more accurate, more faithful financial statements that constitute better representations of actual circumstances than cash basis of accounting.

Since accrual basis accounting records revenues and expenses together in the same time periods based on their causal relationships, it produces more accurate gauges of entities\' performance in any time period. By contrast, the use of cash basis can lead to distortions due to the collection of cash and cash equivalents not aligning with the actual timing of sales.

Disadvantages of Accrual Basis Accounting

The single most important issue in accrual basis accounting is that it requires transactions to be recorded at the times of their occurrence.

Since invoices do not coincide with actual events, this approach necessitates some estimation and guesswork on the part of accountants working under accrual basis accounting.

Furthermore, an entire set of rules and regulations have grown up and around these uncertainties in order to guide their accounting, which means that accrual basis accounting is harder to perform than cash basis accounting.

Example for your understading:

The difference between cash versus accrual basis of accounting can be huge.

Suppose you have a business with these transactions:

1. Received a bill for $5,000 for work done this month by a consultant

2. Paid $150 for a phone bill

3. Sent out an invoice for $12,000 for service fees performed that month

4. Received $150 in fees income

If you were using cash basis, your profit for that month would be $0 ($150 in fees income minus $150 in phone bill). If you were using accrual basis, your profit would be $7,000 ($12,000 in service fees minus $5,000 in consultant expenses).