The Accounting Equation Flashcards
What is the Accounting equation?
Assets = Liabilities + Owners Equity
How is Owners equity calculated?
OE= Capital Contributions + Revenues – Drawings – Expenses
What is Cash accounting
Cash accounting is the process of recording on the basis of when the cash is actually received or paid. Cash accounting only records transactions where cash is involved. Profit based on the cash accounting system is the difference between cash received as income and cash paid for expenses.
What is Accrual Accounting?
Accrual accounting records the impacts of transactions when they occur, even if resulting cash receipts and payments occur in a prior or future period. Accrual accounting records revenues when they have been earned. It also records expenses when they have been incurred even is the related cash has not yet changed hands.
What is the difference between Accrual Accounting and Cash Accounting?
Accrual accounting is more accurate than cash accounting as it reflects all business transactions completed during the period. In addition to this, it provides the most accurate profit and loss for a period. Further, profit or loss based on the ‘accrual accounting system is the difference between revenue earned and expenses incurred for the period.
