what are the advantages and disavantages of cash basis and accrual basis of accounting?

Cash Basis of Accounting

Cash basis of accounting is a method in which the transactions are recognised only when cash is received or paid. It does not record the transaction merely on the basis of their occurrence. It means, under this method of accounting, cash receipts or cash payments are recorded in the books only when they are actually received or paid. In short, it does not take into consideration any accrued incomes or expenses.

Advantages

i) It is easy and simple method.

ii) It provides clear and accurate picture of cash flow.

iii) This method is suitable for the businesses who do not want to ascertain their results on accrual basis.

iv) It is not an appropriate method of ascertaining results of operation because advance incomes or expenses are also taken into account.

Disadvantages

i) It does not depict the true and fair view of financial statement of an organization as depreciation and accrued incomes or expenses are not considered.

ii) It does not comply with revenue recognition and matching principle.

iii) It does not differentiate capital and revenue transactions.

Accrual Basis of Accounting

Accrual basis of accounting is the method in which the transactions are recognised when they accrued or becomes due. It means, under this method, transactions are recorded in the books when they occurred or becomes due irrespective of the fact when the receipts or payments are actually made for the transactions. In other words, it takes into consideration all the prepaid and outstanding incomes or expenses.

Advantages

i) It provides appropriate and true view of financial statements of an enterprise.

ii) It complies with both revenue recognition and matching principle.

iii) Due to its compliance with revenue recognition principle, it is an accurate method of ascertainment ofprofits.

Disadvantages

i) It is a complex method.

ii) It requires specialised knowledge of accounting.

iii) It is a time consuming method in comparison of cash basis of accounting.

iv) This method involves various adjustments which leads to difficulties in preparing financial statements.