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Accrual Basis of Accounting Versus Cash Basis

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Accrual Basis of Accounting versus Cash Basis of Accounting
Danielle Spraker
ACC/290
February 12th, 2013
Michael Olsen

Accrual Basis of Accounting versus Cash Basis of Accounting
Financial scandals that have severely damaged public faith in information provided by organizations have lead to more stringent regulations. A standardized basis of accounting allows for regulators to ensure information is presented ethically and legally. Accrual based accounting is required for all corporations that trade publicly as this basis is generally considered to provide a more accurate image of the financial standing of a company than that of cash based accounting.
Accrual based accounting requires that an organization report expenses and revenues in the time period in which they occur rather than when cash physically changes hands. The text, Financial Accounting: Tools for business decision making, describes accrual accounting as, “Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged. For example, using the accrual basis means that companies recognize revenues when earned (the revenue recognition principle), even if cash was not received. Likewise, under the accrual basis, companies recognize expenses when incurred (the matching principle), even if cash was not paid.” (Kimmel, 2010). For example, if a rental company bills a hotel for chairs used in September but they bill is not due for payment until October, accrual accounting requires the rental company to report the revenue in the books for the month of September. Reporting expenses and revenues as they occur prevent the false appearance of large profits or large deficits during periods in which actual cash flow fluctuates greatly.
Cash based accounting, unlike accrual based accounting,

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