Question 1

?What is the difference between accrual basis accounting and cash basis accounting

Accepted Answer

Accrual basis accounting recognizes revenues and expenses when they are incurred, regardless of when cash transactions occur. This method provides a more accurate picture of a company’s financial performance and position by matching revenues with the expenses incurred to generate them. For example, if a company provides a service in December but receives payment in January, the revenue is recorded in December under accrual accounting. In contrast, cash basis accounting records revenues and expenses only when cash is exchanged. This approach can be simpler but may not reflect the company's financial status as accurately, especially for businesses with significant receivables or payables.

Question 2

?What are the main components of a balance sheet, and what does each component represent

Accepted Answer

The main components of a balance sheet are Assets, Liabilities, and Equity. Assets represent everything a company owns that has economic value, such as cash, inventory, and property. Liabilities are the company's obligations or debts, such as loans and accounts payable. Equity represents the residual interest in the assets of the company after deducting liabilities, essentially reflecting the owners' claim on the business. The balance sheet equation, Assets = Liabilities + Equity, ensures that the financial position of the company is accurately represented, showing how assets are financed either through debt or owners' equity.

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