SMALL AND MEDIUM-SIZED ENTITIES BETWEEN THE ACCRUAL BASIS OF ACCOUNTING AND CASH ACCOUNTING

Should revenue be recognized when generated or when ultimately collected by a company? Should expenses be recognized when incurred or when finally paid? The answers to these questions vary and are dependent or whether a entities employs the cash or accrual basis of accounting. The cash basis of accounting focuses on the cash flows connected with revenue and expenses. But the cash basis of accounting is criticized as not being in accord with economic reality. The accrual basis of accounting overcomes the chief limitation of the cash basis – a possible mismatch of revenue and expenses.