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Week 3 assignment E3-2a - Cash-basis accounting is when a...

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E3-2 On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially. Instructions (a) What is the difference between accrual-basis accounting and cash-basis accounting? Accrual basis is when companies record transactions in the periods in which the events occur. Accrual basis to determine net income is when a company recognizes revenues when they are earned, rather than when they are actually received in cash. The company also recognizes expenses when incurred, rather than when they are actually paid. Medium and large companies use accrual-basis accounting. The alternative to accrual basis is cash basis.
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Unformatted text preview: Cash-basis accounting is when a company records revenue when they receive the cash. When the company pays cash out they record the expense. The cash basis seems to be very appealing because of its simplicity, but it usually produces misleading financial statements for some companies. Cash-basis accounting fails to record revenue that a company has earned but not received the cash. Cash-basis does not match expenses with earned revenues. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Individuals and some small companies do use cash-basis accounting. The cash basis is justified for small businesses because they often have few receivables and payables....
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