Different bases of accounting When discussing the two different bases of accounting, accrual basis accounting and cash basis accounting, it is important to remember that the accrual basis of accounting agrees with both the matching principle and the revenue recognition principle, and that the cash basis of accounting violates both of these principles. Thus, of the two bases, only the accrual basis of accounting complies with generally accepted accounting principles. The basis of accounting utilized by a company depends on the nature of the company. Both of these bases of accounting serve distinct purposes for different reasons, depending on the accounting needs of a given company.
Accrual basis accounting
Accrual basis accounting requires that you record events in the time period in which they occur, regardless if there is money exchanged or not. Accrual basis accounting makes you follow the revenue recognition principle and the matching principle. Revenue recognition principle states that revenue is recorded in the time period which it occurred, not when money is received. Matching principle, also known as the expense recognition principle, states that expenses are recorded when they are accrued not when you pay for them. Accrual accounting takes in to account deferrals and accruals. Examples of deferrals are prepaid expenses such as prepaid insurance premiums and unearned revenues such as prepaid deposits for work to be complete at a later date. Examples of accruals are accrued revenues such as accounts receivable and accrued expenses such as account payable. Accrual basis accounting also allows for depreciation of assets. Depreciation is the process of allocating a portion of the cost of an asset to be expensed over each accounting period during its useful life. Because it complies with universally accepted accounting practices, accrual basis