“ACCRUAL VS CASH BASIS ACCOUNTING”

Enrolled Name: Winda Wijaya
Tutorial time: Thursday 11.00 AM
Tutor: Ian Beck

Accounting is the most crucial part in the business operation as it provides reports which show how well the business operates. In order to maintain a well-develop business, there are lots of things that should be taken into consideration by the business and one of them is choosing the right method to do the accounting. In this essay, two methods of doing accounting will be described specifically, such as: cash-basis accounting and accrual accounting along with advantages and disadvantages of both approaches. Also, this will explain how profit manipulation could occur in a business.
The first method is cash-basis accounting which usually used by small businesses as it records only cash receipts and cash payments, ignoring all receivables, payables, etc (Horngren et al. 2007:12). It treated cash receipts like revenue and cash payments like expenses. It records cash receipts whenever there is cash inflows and records cash payments whenever there is a use of assets and expenses. The second method is accrual accounting which is used by most of the big businesses. According to Horngren et al. (2007:102), effect of each transactions made by business are recorded as it occurs in accrual accounting. Recognition of revenue and matching principle are applied. Revenue will be recorded right after it is earned, expenses will be recorded after it is incurred and there are some accounts that should be created to differ them from revenue and expenses, such as: assets, investments, loans, payable, receivable, etc. The revenue and expenses that incurred will be matched in order to enable the use of those accounts as clear measure of performance. For example, company buy $8,000 inventories in February on credit
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