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Cash and Accrual Accounting

Learn more about cash and accrual accounting.

Cash and Accrual Accounting

  • The accrual system focuses on when a transaction takes place.
  • In contrast, the statement of cash flows is concerned with cash receipts and payments, and not the timing of the underlying transaction.
  • There can be a significant difference between an entity’s cash position and its profit.

Difference Between Cash and Accrual Accounting

Statement of Profit or Loss
Income $20,000, Cost of sales 5,600, Gross profit 14,400, Expenses - Rent $1,000, Wages 4,000, Depreciation 1,500, Profit $7,900
Statement of Cash Flows
Beginning cash balance $2,000, Cash flows - Receipts from sales $5,000, Payments for inventory $(6,000), Payments for rent (1,000), Payments for wages (4,000), Net cash flows (6,000), Closing cash balance $(4,000)

The Statement of Cash flows

Reports:
  • cash balance at beginning and end of period
  • cash inflows and outflows for the period
  • net cash for the reporting period.
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