...Accrual vs. Cash Basis Accounting XXXXXXXXXX ACC290 XXXXX, XX, XXXX XXXXXX XXXXXX Introduction In business, there are many different forms and standards to accounting. These standards are governed by rules, laws, regulations and accurate accountability of a particular business account. There are some general differences between general and commercial basis accounting principles, also differences between accrual and cash basis accounting. Those differences will be looked at here. General and Commercial Basis Accounting Principles According to Wikipedia.com, generally accepted accounting principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. These include the standards, conventions, and rules that accountants follow in recording and summarizing and in the preparation of financial statements. Hubpages.com discusses commercial accounting, also known as profit accounting, defining that it performs primarily by profit and loss. The reporting for a profit organization is directed to the investors. ("The Principles Of Commercial Accounting And Fund Accounting", 2011). Accrual vs. Cash Basis Accounting According to the readings, accrual basis accounting is defined as in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged. In other words...
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...Cash vs. accrual: Is there a difference in recognizing transactions? ACC205: Principles of Accounting I Professor Student Name Date Cash vs. accrual: Is there a difference in recognizing transactions? Cash and accrual based accounting are two ways use to record revenue or expense transactions. However, there is a difference in recognizing cash and accrual accounting transactions. Moreover, in cash basis accounting, a transaction is recognized when the money changes hands. Therefore, cash receipts are treated as revenue and payments are treated as an expense. However, in accrual basis accounting, it records the effect of each transaction as it occurs. Revenues are recorded when they are earned and expenses are recorded when occur. Furthermore, in accrual accounting it does not matter when the money is received for the sale or when the expense was paid. Therefore, A business that keeps its financial records ("books") on the cash basis (or method) records revenue when received and expenses when paid. Its simple, and the income statements reflect the true cash inflow and outflow of the business. The downside is the financials may not truly reflect the value created or lost, at least not when it's created or lost. Accrual accounting is quite different. It basically ignores when the cash actually goes in and out. Revenue is booked when its earned, and expenses are booked when the liability is incurred...
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...• What is the difference between accrual-basis accounting and cash-basis accounting? The difference between the two types of accounting is when revenues and expenses are recorded. The accrual-basis and cash-basis are different because, accrual-basis is revenues and expenses incurred of cash collected or cash released. However, cash-basis is keeping accounts that includes as income received in cash and as expenses paid in cash. • Why would politicians prefer the cash basis to the accrual basis? Politicians prefer cash basis because they can tax a higher percentage. Politicians like cash-basis better than accrual basis because it is an easy method to keep track of income and expenses. This system used for income tax purposes and makes businesses declined in value. The accrual-basis is revenue recognized when earned. • Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting. March 25, 2011 440 Louisiana, Houston, Texas 77002 Dear Senator Ellis: The purpose of this letter is to address why the Federal Government should adopt the accrual basis of accounting system. Viewpoints of the benefits of accrual basis accounting are • Helps in compare performance and stability from one reporting period to the next • Tends to overstate revenue • Focus on the outputs of a business rather than inputs • Improved accountability • Provides tracking accounts receivable and payable more...
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...Accrual versus Cash Basis Accounting Sandra Fletcher ACC/290 March 6th, 2012 Bryan Carey Accrual versus Cash Basis Accounting Commercial accounting and general accepted accounting principles, generally prescribe the accrual basis of accounting over the cash basis. Because there are many benefits of the accrual basis accounting including, forecasting and invoices recognition this method is most used. Accrual basis accounting means a company recognizes revenue when earned while cash is still pending or not yet received. The matching principle is used to recognize expenses when incurred even when the cash is not yet received. Under the cash basis accounting, companies record revenue only when the cash is received and record expenses only when the cash is paid out. The cash basis of accounting is prohibited under the generally accepted accounting principles because it does not record revenue when revenue is earned. In response this violates the revenue recognition principle and it does not record expenses when incurred, in turn violates the matching principle. Timing plays a large role in these practices. One key method of accounting is recognizing income and expenses. The basic difference between cash and accrual methods of accounting is related to when the revenue and expenses are recognized. Cash basis recognizes revenue when money comes in and recognizes expenses when money is paid out. Cash basis doesn’t recognize accounts receivable or payable. Hence, the difference...
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...acc Accrual V.S. Cash Accounting Miguel Gonzalez ACC/290 August 3, 2012 Dr. Dorothy Welch In this assignment, I will describe the cash basis of accounting and the accrual basis of accounting and will explain the difference. Cash Basis accounting is the easy and less expensive method of accounting. In this method of accounting, cash is recognized when the physical cash transaction occurs. Thus, this method does not recognize payables, receivables, and prepaid expenses. Additionally, cash basis accounting does not comply with the revenue recognition principle and the matching principle. In accrual basis of accounting, revenue is recognized when it is earned and expenses are recognized when they are incurred. Susan Ward states, “Accrual basis accounting gives the most accurate picture of the financial state of your business.” We are essentially keeping track of the most current business practices, such as to who owes who money, and service. When the customer owes us money, we create an accounts receivable. When we owe money we create an accounts payable. When we pay cash before an expense we create a deferred expense account. There are key differences between the methods of accounting. In cash basis, taxable income may be deferred to the next year due to delays in billing. However, in accrual basis, the company might have to pay taxes on income before payment is received. Under the cash basis method, there is no company...
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...Accrual Basis versus Cash Basis After external transactions and events are recorded for an accounting period, several ac- counts still need adjustments before their balances appear in financial statements. This need arises because internal transactions and events remain unrecorded. Accrual basis account- ing uses the adjusting process to recognize revenues when earned and to match expenses with revenues. Cash basis accounting recognizes revenues when cash is received and records expenses when cash is paid. This means that cash basis net income for a period is the difference between cash receipts and cash payments. Cash basis accounting is not consistent with generally accepted accounting principles. It is commonly held that accrual accounting better reflects business performance than in- formation about cash receipts and payments. Accrual accounting also increases the compar- ability of financial statements from one period to another. Yet cash basis accounting is use- ful for several business decisions—which is the reason companies must report a statement of cash flows. To see the difference between these two accounting systems, let’s consider FastForward’s Prepaid Insurance account. FastForward paid $2,400 for 24 months of insurance coverage beginning on December 1, 2004. Accrual accounting requires that $100 of insurance expense be reported on December’s income statement. Another $1,200 of expense is reported in year 2005, and the remaining $1,100 is reported as expense...
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...Summary Nedra Dennis ACC/290 April16,2012 Dan Perez Summary Describe the difference between commercial accounting and general accepted accounting principles. Describing and explain the difference of the accrual and cash basis of accounting. Commercial accounting is an accurate reflection of business transacted . Commercial accounting can only be obtained if both cash and credit transactions are performed and recognized and recorded in such a manner that there is no duplication and yet the transactions are recorded under the commercial accounting. It is done in a system known as double entry book keeping or commercial accounting system which records both aspects of transactions. It also records credit transactions in cash accounting date of receipt. In commercial accounting the date in which the transaction was made needs to be recorded regardless if it was paid or not. General accepted accounting principle (GAAP) is the collection of standards and practices required to be used by business’s to record and present the results of their financial activities and their records of what they owe. Accrual basis accounting accurately matches your income and expenses, but if this method is not managed carefully you could lose track of your actual cash flow. For example you could be recording lots of income for jobs completed, but not receiving payments on a transaction. Under accrual basis transaction that changes a company’s financial statements are recorded in which the events...
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...methods of recording accounting transactions are cash basis accounting and accrual basis accounting. Each method has both advantages and disadvantages. However, only one method is approved by GAAP. Cash basis accounting is the method in which cash receipts and cash payments are recorded during the period in which they occur (Spiceland et. al., p. 7). Under the cash basis accounting method, the revenue is recognized when the cash is received and the expense is recognized when the cash is disbursed. In addition, there is no inventory account under the cash basis method. Goods and materials purchased for sale are recorded as direct costs in the period that payment is made for those goods and materials (Berry). Cash basis accounting is a simple and inexpensive method to implement and utilize. It also provides an accurate representation of cash flow. Additionally, the cash basis method provides the opportunity to "defer taxable income by delaying billing so that payment is not received in the current year.Cash basis accounting does not comply with two important accounting principles: the revenue recognition principle and the matching principle. Since the cash basis technique does not recognize receivables or payables, it is not an accurate method of measuring profit (Nelson). Accrual basis accounting is the method in which revenue is recognized when earned, and expenses are recognized when incurred. Additional accounts must be created to record the difference between the recognition...
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...these two organizations the learning team will be discussing how differences in the industries and different measurements conventions affect presentations, and if one of the companies uses the cash basis of accounting, how would that differ from the accrual basis. The team will also be discussing in what ways the elements of the financial statements interact with one another. How might changing one of the financial statements affect the other financial statements? Why is it essential to understand the relationship between the financial statements? In what ways do the elements of the financial statements interact with one another? The objectives of Financial Statement presentation are to show an interrelated financial depiction of an entity's activities, to disaggregate information so that it is useful in evaluating an entity's future cash flows, and to present information about liquidity and financial flexibility of said entity. An organized financial picture means items in financial statements are clear and that the financial statements of an entity complement one another regularly. Financial statement analysis aimed at objectives such as assessing the amount, timing, and uncertainty of future cash flows requires financial information that is disaggregated into reasonably homogeneous groups of items. If items differ economically, users may wish to take that into account differently in predicting future cash flows (2009). An entity’s liquidity is important because it allows...
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...The difference between the two types of accounting is when revenues and expenses are recorded. Accrual basis accounting is described as a company’s income, which is reported in the actual fiscal period the income is earned. It is reported no matter when the income is actually received and the expenses are subtracted in the fiscal period they are incurred regardless if they are paid or not paid. Cash-basis is better managed by a company who does not have many receivables to record. They are more likely used when a payment is made at the time a good or service is sold. Accrual basis accounting provides information that is more useful than cash-basis financial statements because it provides all of the exchanges an organization has made even when they are made on account. In a cash-basis, you will see cash transactions only. The issue with cash basis is many transactions in an organization are not made using cash. The accrual-basis and cash-basis are different because, accrual-basis is revenues and expenses incurred of cash collected or cash released. However, cash-basis is keeping accounts that includes as income received in cash and as expenses paid in cash. Accrual basis is a type of accounting that each item is entered as it is earned or incurred regardless of when the actual payment is made or received or made. This means that a business enters account status as earned revenue in the time period that is current not when we receive the payment. However, cash-basis...
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...5. Government accounting and the use of the accruals basis 5.1 Government accounting Government accounting is the process of recording, analyzing, classifying, summarizing communicating and interpreting financial information about government in aggregate and in detail reflecting transactions and other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. The purposes of government accounting are: • To carry out the financial business of government in a timely, efficient and reliable manner (e.g. to make payments, settle liabilities, collect sums due, buy and sell assets etc.) subject to necessary financial controls. • To keep systematic, easily accessible accounting and documentary records as evidence of past transactions and current financial status, so that detailed transactions can be identified and traced and all aggregates can be conveniently broken down into their constituent parts. • To provide periodic financial statements, containing appropriately classified financial information, as a basis for (a) stewardship and accountability and (b) decision-making. • To maintain financial records suitable for budgetary control, internal control and the needs of auditors. • To provide means for effective management of government assets, liabilities, expenditures and revenues. In government, the producers of accounting information are rarely qualified accountants. Therefore few...
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...Week Three Accrual and Cash Basis Bi-Le’ DeRouen ACC/290 November 1, 2012 Dana Babin Week Three Accrual and Cash Basis Both cash basis of accounting and accrual basis of accounting can be the best of both worlds when using software. However to prefer one over the other to ensure the most advantage way can be a bit of a trick. Determining the differences between the two bases will be established. In the event an accountant decides accrual basis over cash basis he or she understand transactions that charge an organization’s financial statements are recorded in the time period in which the events occur, even if currency was not received. Receivables are recorded if payment is not received at the point of sale, revenues and expenses will be recorded in full, payables are recorded whether payment is made or not at the purchase time, and it is important to know that organizations and companies recognize expenses when incurred. Compared to cash basis accounting, companies and organizations record revenue only when currency is received, and also recording expense when cash is salaried. When using cash basis the accountant is not to record expense when incurred nor is he or she to record revenue when earned. The cash basis is prohibited under (GAAP) generally accepted accounting principles (“Understanding Cash and Accrual Basis Accounting “, 2012). Cash basis can be quicker and easier to use versus accrual. It is very simple, when funds are available to pay bills checks...
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...Current status of public sector accounting in Malaysia- Cash Basis Accounting Revenue is only recorded when the cash is actually exchanged for example, when revenue is received as cash and when expenses are actually paid. http://www.quora.com/What-are-the-differences-between-cash-basis-and-accrual-basis-accounting Why government used the cash basis of accounting? * Easy to learn and carry out and requires care but no special accounting skills. * Well-adapted to needs of budgetary control and payment is more ascertain. * Strict budget control can be exercised by comparing sums authorized with those actually spent * Easy to understand and verify * A statutory requirement in many countries Arguments of accruals basis Cash basis accounting does not work well for companies that have inventories and sell on credit. Accrual basis accurately reflects the company true financial position. Cash based only report revenue and expense when you receive and pay cash. * Cash accounting does not generate enough useful information for example payables and receivable. Only accrual accounting provides adequate information on the full costs of operation, thus supporting decision-making for example Full cost information (including noncash costs such as depreciation, and accrued civil service pensions) is essential for assessing the efficiency of government services and thus is * Accrual basis generate reliable information on the full range of assets and liabilities...
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...Accrual and Cash Accounting Accrual and Cash Accounting Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011) “Accrual-basis accounting (p. 166) Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company’s financial statements, even if cash was not exchanged.” Accrual accounting is an accounting process that could be properly utilized by a large company. One example is a company that is turning over millions of dollars in revenue yearly. A large company that is generating that much money and turning it around yearly has to maintain large volumes of cash flow. Without the large volume of cash flow, the company would be unable to maintain high volumes. Because of the high cash flow, money is constantly coming in and going back out. One example in today’s market is Wal-Mart/Sam’s Club stores. A company this size can afford to use the accrual method because it does not have to maintain a close watch on how much actual money is in the bank at any given time. The retail company has cash flow to order inventory, make payroll, and pay other bills at any given time. The accrual-basis is a better accounting process because it accurately creates a picture of the actual profits during a given time. It can make for clear tax predictions as well as accurate projections. Averkamp, H. (2014) “The accrual basis of accounting provides a better picture of a company's profits during an accounting period...
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...The difference between the two types of accounting is when revenues and expenses are recorded. Accrual basis accounting is described as a company’s income, which is reported in the actual fiscal period the income is earned. It is reported no matter when the income is actually received and the expenses are subtracted in the fiscal period they are incurred regardless if they are paid or not paid. Cash-basis is better managed by a company who does not have many receivables to record. They are more likely used when a payment is made at the time a good or service is sold. Accrual basis accounting provides information that is more useful than cash-basis financial statements because it provides all of the exchanges an organization has made even when they are made on account. In a cash-basis, you will see cash transactions only. The issue with cash basis is many transactions in an organization are not made using cash. The accrual-basis and cash-basis are different because, accrual-basis is revenues and expenses incurred of cash collected or cash released. However, cash-basis is keeping accounts that includes as income received in cash and as expenses paid in cash. Accrual basis is a type of accounting that each item is entered as it is earned or incurred regardless of when the actual payment is made or received or made. This means that a business enters account status as earned revenue in the time period that is current not when we receive the payment. However, cash-basis...
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