What Is Basis of Accounting?
Basis of accounting refers to the method used to recognize revenues and expenses in financial statements. The two main types are accrual basis and cash basis accounting.
Key Takeaways
- Definition: The method for recording financial transactions.
- Types: Accrual basis and cash basis.
- Purpose: To determine when revenues and expenses are recognized.
Types of Basis of Accounting
- Accrual Basis: Revenues and expenses are recorded when they are earned or incurred, regardless of when the cash is received or paid.
- Cash Basis: Revenues and expenses are recorded only when cash is received or paid.
Importance of Basis of Accounting
The basis of accounting chosen by a company affects the timing of revenue and expense recognition, impacting financial statements and decision-making. It is crucial for consistency, comparability, and compliance with accounting standards.
