ch-4

Question 1

Distinguish between cash basis of accounting and accrual basis of accounting?

Answer 1

Cash basis of accounting- It is a system of accounting according to which transactions are recorded in the books of account when cash is received or paid
Accrual basis of accounting- It is a system of accounting according to which transactions are recorded in the books of account when transaction is entered into irrespective of cash having been received or not

Question 2

What are the advantages of cash basis of accounting?

Answer 2

1. Simple basis of accounting
2. More objective
3. Suitable for those enterprises where most of the transactions are on cash basis

Question 3

What are the disadvantages of cash basis of accounting?

Answer 3

Does not give a true and fair view of the profit/loss and the financial position of an enterprise

Question 4

What are the advantages of accrual basis of accounting?

Answer 4

1. Shows a complete picture of financial transactions
2. Discloses correct profit/loss for a particular period
3. Reflects true financial position at the end of the accounting period

Question 5

What are the disadvantages of accrual basis of accounting?

Answer 5

1. Not as simple as cash basis of accounting
2. Too elaborate
3. A quick appraisal of profit/loss is not possible because many adjustments are required to ascertain the true financial position of the business