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Sixth Canadian Edition

Prepared by:
Gabriela H. Schneider, CMA; Grant MacEwan College

Appendix 3B
Cash Basis Accounting versus
Accrual Basis Accounting
Learning Objectives

1. Differentiate the cash basis of accounting

from the accrual basis of accounting.
Cash Basis and Accrual Basis
The cash basis considers only cash receipts
and cash payments for the year
As a result, both the Revenue Recognition
and the Matching Principle are ignored
Cash basis financial statements do not
conform to GAAP
Accrual basis considers revenues when
earned and expenses when consumed in
determining net income
Cash and Accrual Basis: Example

Johnson Company, a retailer, starts operations on

January 1, 2000, and reports the following
Sales, $200,000 (20% cash and 80% credit)
Accounts Receivable end of year: $16,000
Purchases, $120,000 (30% cash and 70% credit)
Accounts Payable end of year: $8,200
Depreciation expense for 2000: $3,450
Ending inventory of goods: $12,000
Accrual Basis: Example
Sales Revenue:
Cash sales $ 40,000
Credit sales: 160,000
Net Sales $200,000
Cost of Goods Sold:
Purchases $ 120,000
less: Ending inventory 12,000 108,000

Gross Profit 92,000

Less: Depreciation Expense 3,450

Income Before Taxes $ 88,550

Cash Basis
Cash Receipts:
Cash sales $ 40,000
Collections from credit sales:
Credit sales: $160,000
Less: Accounts. Receivable.: 16,000 144,000
Net Cash Revenue $184,000
Cash Payments:
Cash Purchases $ 36,000
Payments to vendors on account:
Credit purchases: $84,000
less: Accounts Payable: 8,200 75,800
Net Cash Expenses $ 111,800
Excess of Collections over Receipts $ 72,200
Reconciliation of Cash and
Accrual Base Income

Accrual Base Income: $ 88,550

Add: Non-cash charge

Depreciation 3,450
Less: Uncollected revenue $16,000

Unpaid purchases 3,800 19,800

Excess of collections over payments $ 72,200

Reconciling Cash Basis Receipts
with Accrual Revenue


- Beginning Accounts Receivable

Cash received + Ending Accounts Receivable Accrual
from Based
customers + Beginning Unearned Revenue Revenue
- Ending Unearned Revenue
Reconciling Cash Basis Payments
with Accrual Expenses


Cash paid + Beginning Prepaid Expenses

- Ending Prepaid Expenses Accrual
operating - Beginning Accrued Liabilities Expenses
expenses + Ending Accrued Liabilities
Cash Basis Weaknesses

Current economy is largely credit-based

Information on future cash flow
commitments is crucial to investors and
Cash basis accounting does not provide
information on future cash flows
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