The main difference between these two forms of accounting goes right back to timing. Of course, timing has a partner here. It is called revenue recognition. Cash basis only records revenue when cash is received, and not a moment before. It also only recognizes an expense when cash has been paid out. So, even if a bill is sitting on your desk, if it has not been paid, it is not considered an expense in cash basis accounting – at least not until you write a check to pay that bill.

In the accrual basis, revenue is recognized when it is earned and not when it is received. Expenses are recognized when bills are received regardless of when they’re paid.

Another pretty important difference in these two forms of accounting is how well cash is tracked. Cash-basis accounting does an excellent job of tracking cash flow because it records the inflows and outflows only when they occur.

Useful Life is the estimated lifespan of a depreciable fixed assets during which it can be expected to contribute to company operations. This is an important concept in accounting, since a fixed asset is depreciated over its useful life. Thus, altering the useful life has a direct impact on the amount of depreciation expense recognized per period.

As an example of useful life, a fixed asset is purchased at a cost of $10,000. The company controller estimates its useful life to be five years, which means that the business will recognize $2,000 of depreciation expense per year in each of the next five years. If the controller had instead stated a useful life of six years, the annual depreciation would instead have been $1,667.

A method of financial statement analysis in which each entry for each of the three major categories of accounts (assets, liabilities and equities) in a balance sheet is represented as a proportion of the total account. The main advantages of vertical analysis is that the balance sheets of businesses of all sizes can easily be compared. It also makes it easy to see relative annual changes within one business.