COMMERCE 1AA3 Study Guide - Quiz Guide: Cash Flow Statement, Accrual, Retained Earnings

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 1AA3
• Professor: All

Document Summary

Question 1: briefly explain the difference between the cash basis of accounting and the accrual basis of accounting. The cash basis of accounting recognizes revenues and expenses only when cash is received or paid. There is no need for receivable or payable accounts since no accruals are made. This eliminates the need for adjustments at the end of the period. Under the accrual basis of accounting, the accountant recognizes the impact of a business transaction on an entity when the transaction occurs, whether or not cash is received or paid. The accountant will record revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. Adjustments are usually necessary at the end of the period to update certain asset and liability accounts and to recognize revenues that have been earned but not collected and expenses that have been incurred but not paid.