Explain why a balance sheet prepared under accrual accounting differs from one prepared under cash basis accounting.

Explain why a balance sheet prepared under accrual accounting differs from one prepared under cash basis accounting.

• A. Accrual basis includes receivables and payables; cash basis records only cash transactions.
• B. Accrual basis ignores receivables and payables; cash basis includes them.
• C. Cash basis includes all non-cash transactions; accrual does not.
• D. They are exactly the same.

Answer: (A)

Under accrual accounting, the balance sheet reflects resources and obligations that exist because revenues have been earned and expenses have been incurred, not just when cash changes hands. This means accounts receivable (money owed by customers) and accounts payable (money owed to suppliers) appear on the balance sheet, because they represent promised inflows and outflows that will affect future cash. In contrast, cash basis accounting records only actual cash inflows and outflows. Revenue is recognized when cash is received and expenses when cash is paid, so receivables and payables aren’t recorded. The result is a balance sheet under cash basis that shows mainly cash movements, not the outstanding earned revenues or incurred obligations. That’s why the statement that accrual includes receivables and payables while cash basis records only cash transactions is the best explanation.

Under accrual accounting, the balance sheet reflects resources and obligations that exist because revenues have been earned and expenses have been incurred, not just when cash changes hands. This means accounts receivable (money owed by customers) and accounts payable (money owed to suppliers) appear on the balance sheet, because they represent promised inflows and outflows that will affect future cash. In contrast, cash basis accounting records only actual cash inflows and outflows. Revenue is recognized when cash is received and expenses when cash is paid, so receivables and payables aren’t recorded. The result is a balance sheet under cash basis that shows mainly cash movements, not the outstanding earned revenues or incurred obligations. That’s why the statement that accrual includes receivables and payables while cash basis records only cash transactions is the best explanation.