Please answer each questions clearly with required examplses

Please answer each questions clearly with required examplses so that I can expand and write an essay on them.

Theme: \"What\'s the difference between accrual basis accounting and cash basis accounting?\" Following are some ideas that you can start with to set the stage for developing your critical thinking skills: 1. Select your favorite type of business such as service company, manufacturing or merchandise business. 2. Research the information by using various online resources or come to your local library. Write your thesis statement down and make a tentative outline. 3. Imagine you are the owner of the business you choose. Which accounting basis would you more inclined to use and why? 4. Did your accounting basis have some common drawbacks? Think about the tax reporting purposes. Yes, no one can avoid for paying taxes, same as the business.

Solution

1. Lets take the business of Chocolate Manufacturing.

2. Differences between Cash Basis and Accrual Basis-

Cash basis means you book all expenses and liabilities as and when you make the payment.

Accrual basis means irrespective of whether the expense is paid or not, if the expense is payable within the accounting year, it has to be provided. For example, the auditor audits for the financial year say 1.4.2017 to 31.3.2018 but he audits after the year end say some time in the month of May 2018 but his fee is due on 31.3.2018 so you have to pass the entry for audit fee as expenses and credit the auditor or audit fee payable as this has accrued on 31.3.2018.

Cash basis is a cost effective method whereas accrual basis isn\'t because having accrual basis requires employing a permanent accountant and his salary will be an added burden to the concern.

3. If I\'m the owner of Chocolate Manufacturing concern, I would be more inclined towards accrual basis of accounting because when you operate on such a large scale, then are bound to have credit purchases and credit sales, if you would follow cash basis, then purchases not paid and sales not received would not be reflected in the Financial Statements and the results would become misleading. Therefore I would be more inclined towards accrual basis of accounting. Cash basis is useful only when the business is small and there are no credit transactions and all the expenses are paid instantly.

4. My accounting basis i.e. Accrual basis has a drawback that it isn\'t a cost effective method. Whereas Cash basis has a drawback that Cash basis is not a widely recognised method of accounting, as it is mandatory to follow accrual basis if the concern has inventory.