For cash basis accounting, revenue is recognized when money is received while expenses are recognized when paid. On the other hand, for accrual basis accounting, revenue is realized when it is earned while revenue is realized once it is incurred.
Work Step by Step
Most companies prefer the accrual basis because it recognizes and matches effort (expense) to accomplishment (revenue) while the cash basis compares receipts issued to receipts received. Thus, the income statement, as well as the balance sheet of the accual basis, are more accurate compared to those of the cash basis. Moreover, compared to an accrual basis, the cash basis does not maintain certain accounts such as prepayments, payables, receivables, deferrals, and accruals.