Understanding Accounting Principles: Cash Basis vs. Accrual Basis

The video tutorial explains two accounting principles: cash basis and accrual basis. It begins with an introduction to Peter's grocery business and discusses the cash basis of accounting, highlighting its simplicity and suitability for small businesses. However, it also points out the drawbacks, such as inaccurate asset status and potential stock errors. The tutorial then introduces the accrual basis of accounting, which records transactions when they occur, providing a more accurate financial picture. The session concludes with an exercise to identify the accounting system used in various scenarios.

What is a key advantage of the cash basis of accounting?

• It provides a true and fair view of the business.

• It is complex and requires professional knowledge.

• It is easy to understand for those with little financial background.

• It records all transactions, including credit ones.

Why might the cash basis of accounting give an incorrect status of assets?

• It is used by large corporations.

• It does not record transactions until cash is exchanged.

• It records transactions as they occur.

• It includes all credit transactions.

In the example of the electronic business, what issue arises from using the cash basis of accounting?

• The sale is recorded immediately.

• The product is shown as sold twice.

• The product is never recorded as sold.

• The cash is received before the sale.

What is the accrual basis of accounting?

• Recording transactions at the end of the fiscal year.

• Recording transactions only when cash is exchanged.

• Recording only credit transactions.

• Recording transactions when they occur, regardless of cash flow.

When should Peter record a purchase made on credit according to the accrual concept?

• When the payment is made.

• When the goods are delivered.

• When the purchase is confirmed.

• At the end of the month.

How does the accrual method treat a $400 electric bill?

• It is recorded when the bill is paid.

• It is recorded when the bill is received.

• It is recorded in the period the expense relates to.

• It is not recorded at all.

Which accounting method is used when a dentist records fees only upon receiving cash?

• Deferred basis

• Hybrid basis

• Cash basis

• Accrual basis