...d it is an approach to record transaction of all larger businesses. Cash basis is an accounting method which revenues will only be recorded when received, and expenses to be recorded when paid to the creditor. Timing of revenues and expenses to be recognize had always been the main difference between accrual and cash basis. For example, let say you own a business that sell computers and you sell RM4800 worth of computers. Under accrual basis, the RM4800 is recorded as revenue as soon as the sales is made, even if you did not receive the money immediately. While for cash basis, the amount of the sales, Rm4800 will not be recorded until the day payment is made by the debtor. For accrual basis, if there is payment made in advance for services...
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...CASH BASIS, MODIFIED CASH BASIS AND ACCRUAL BASIS OF ACCOUNTING Accrual Basis 1. The effects of transactions and other events on the accounts of a business are recognized and reported as they occur regardless of when cash is received or paid. 2. Revenues are recognized and reported when earned regardless of when cash is received. 3. Expenses are normally recognized in the period when it is incurred. 4. Requires recognition of accruals (accrued revenues and expenses) and deferrals (prepaid expenses and unearned income). 5. It attempts to better match revenues and expenses in determining the net income for an accounting period. 6. Adjustments are necessary at the end of the accounting period to update certain assets, liabilities, revenues and expenses. Pure Cash Basis 1. The effects of transactions and other events on the accounts of a business are recognized and reported only in the period when cash is actually received or paid. 2. Revenues are recognized in the period when cash is received irrespective of when earned. 3. Expenses are recognized in the period when cash is paid irrespective of when incurred. 4. There is no need to recognize accruals and deferrals since these items do no involve cash neither receipts nor payments. 5. Receivables are not taken up. 6. Values of inventories are ignored. 7. Property assets are treated as expenses 8. It does not give a good picture of profitability because net income is materially distorted. 9. It is straightforward...
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...Accrual and Cash Basis Accounting XACC/290 February 8, 2015 Accrual and Cash Basis Accounting Accrual accounting is when a company accounts for their transactions as the event occurs, not necessarily when the actual cash transaction takes place. When the revenue is earned can be a different time than when the revenue is paid for; for example, when Company A is called in to fix an intercom for a tenant of one of Company B’s buildings. The revenue is earned on January 30 and will be on January’s transactions; however, Company B does not pay Company A until they are billed in February, when the revenue is recognized (Kimmel, Weygandt, & Kieso, 2009). On the other hand, cash accounting takes into account when the actual cash transaction takes place, when cash is exchanged for a transaction, the revenue is then recorded as earned. It is acceptable for an accountant to use cash basis accounting and not violate the generally accepted accounting (GAAP) for companies that are in the service industry. A nanny that works for a family may work from January 26th to February 9th and bills the family for that two week time period on February 9th. The family would pay in February and the revenue would be recognized as being earned in February (Kimmel, Weygandt, & Kieso, 2009). All in all, accrual accounting requires more work, but is generally accepted account principles and the more accurate of the two different accounting practices. Reference Kimmel, P. D., Weygandt...
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...The two main 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...
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...Study: Cash Basis or Accrual Basis? Andy Courtney ACC/497 November 30, 2015 Robert Davis Case Study: Cash Basis or Accrual Basis? Question 1) Based on the FARS, standard-setters have said that accrual accounting is superior to cash basis accounting. Accrual accounting reflects the true financial obligations of an organization when compared to cash basis accounting. Thus, portraying a more accurate description of the organization’s financial position and financial status. Question 2) This statement was included in the FASB pronouncement Statement of Financial Accounting Standard No. 106 which covers 'Employers' Accounting for Postretirement Benefits Other Than Pensions' which was released in the year 1990. Question 3) The cash basis method is used often by small businesses, including non-profits. Allowing the use of cash basis accounting for smaller businesses is more effective and preferable to accrual accounting. Any business with smaller and simpler transaction processes does not need a complex accounting system like accrual accounting. Question 4) Cash basis accounting is much easier to audit than accrual basis accounting because the audit trail is easier to verify and review for accuracy. Also, there are no adjusting entries to create and review. Question 5) Yes, the FARS suggests the existence of guidance that sponsors the idea that certain earnings may be accounted for on an accrual basis while the related income taxes are accounted for on a 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...
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...Cash Basis Accounting vs. Accrual Basis Accounting ACC/290 January 28, 2013 Paulette Schirmer Cash Basis Accounting vs. Accrual Basis Accounting When a business opens its doors it needs to decide which accounting method to use to keep their financial records. The two accounting methods are the cash basis and the accrual basis. Both methods can be used, but the company should choose which method would be a good fit for their company. Cash basis accounting method is strictly cash in, cash out basis. This means that financial transactions are recorded only when money is given or paid (Kimmel, Weygant, & Kieso, 2009). Cash basis is used mostly by small business where owners want a simple way of understanding their financial statement just to see if there is a profit or loss in the company. The income and expense is more accurate (“Cash Basis”, 2004-2013). In the accrual basis accounting method income is reported in the period it is earned, regardless of when it is received, and expenses are recorded when they have incurred even if it were paid (Kimmel, Weygant, & Kieso, 2009). According to Entrepreneur Media, Inc. (2013), the accrual method requires a business’s annual sales be over $5million and its venture be structured as a corporation. Also businesses with inventory is to use the accrual basis as well, and it is highly recommended to use the accrual basis if the business sells or pays on credit. Cash basis will always see income when the money is received...
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...3-1 Classify the following adjusting entries as involving prepaid expenses (PE), unearned revenues (UR), accrued expenses (AE), or accrued revenues (AR). a. UR To record revenue earned that was previously received as cash in advance. b. PE To record annual depreciation expense. c. AE To record wages expense incurred but not yet paid (nor recorded). d. AR To record revenue earned but not yet billed (nor recorded). e. PE To record expiration of prepaid insurance. 3-9 In its first year of operations, Harden Co. earned $39,000 in revenues and received $33,000 cash from these customers. The company incurred expenses of $22,500 but had not paid $2,250 of them at yearend. Harden also prepaid $3,750 cash for expenses that would be incurred the next year. Calculate the first year’s net income under both the cash basis and the accrual basis of accounting. Accrual Method Revenues 39,000 Expenses 22,500 Prepaid 0 Net Income = 16,500 Cash Method Revenues 33,000 Expenses 20,250 Prepaid (Expense) 3,750 Net Income = 9,000 3-1 In the blank space beside each adjusting entry, enter the letter of the explanation A through F that most closely describes the entry: A. To record this period’s depreciation expense. B. To record accrued salaries expense. C. To record this period’s use of a prepaid expense. D. To record accrued interest revenue. E. To record accrued interest expense. F. To record the earning of previously unearned income. ___B___ 1. Salaries Expense ....
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...record the transaction of a company, which are cash basis accounting and accrual basis accounting. In this essay, I will talk about the differences between the two accounting systems. Then the advantages and disadvantages of cash basis and accrual basis accounting will be discussed. The statement in the third sentence about how to calculate profit uses accrual basis accounting method instead of cash basis accounting. Rich et al. (2009, p.115) says “ under cash basis accounting, revenue is recorded when cash is received, regardless of when it is actually earned. Similarly, an expense is recorded when cash is paid, regardless of when it is actually incurred.” It means that cach basis accounting only records transactions when the cash has been received or paid out. Accrual basis accounting (also called accrual accouting) is another system of transaction recording for a organization. It is an alternative system to cash basis accounting. “ under accual accounting, a company records recenues in the accounting period in which they are earned and realized, and records expenses in the accounting period they are incured.” (Nikolai, Bazley & Jones, 2009, p.105) It means that the corporation records the transaction in the period in which the events occur without consider when the cash is received or paid out. There are some differences between cash basis and accrual basis accounting. In order to distinguish cash basis accounting from accrual basis accounting, it is necessary to know the time...
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...discussing the two different bases of accounting, accrual basis accounting and cash basis accounting, it is important to remember that the accrual basis of accounting agrees with both the matching principle and the revenue recognition principle, and that the cash basis of accounting violates both of these principles. Thus, of the two bases, only the accrual basis of accounting complies with generally accepted accounting principles. The basis of accounting utilized by a company depends on the nature of the company. Both of these bases of accounting serve distinct purposes for different reasons, depending on the accounting needs of a given company. Accrual basis accounting Accrual basis accounting requires that you record events in the time period in which they occur, regardless if there is money exchanged or not. Accrual basis accounting makes you follow the revenue recognition principle and the matching principle. Revenue recognition principle states that revenue is recorded in the time period which it occurred, not when money is received. Matching principle, also known as the expense recognition principle, states that expenses are recorded when they are accrued not when you pay for them. Accrual accounting takes in to account deferrals and accruals. Examples of deferrals are prepaid expenses such as prepaid insurance premiums and unearned revenues such as prepaid deposits for work to be complete at a later date. Examples of accruals are accrued revenues such as accounts receivable...
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...Brain Teaser 4: Cash Basis or Accrual Basis a) Use FARS to identify what standards-setters have said as to the superiority of accrual accounting relative to a cash basis. Do you agree with the justification for accrual accounting? Explain? The FASB has stated that the accrual-basis method is superior to the cash-basis method. For example, the accrual-basis method promotes the caution and equivalent concepts, which are two of the fundamental accounting concepts. Thus, dissimilar to the cash-basis method, financial statements indicate the actual responsibilities of an organization and what resources the organization actually possesses. This means the accrual basis method offers a more precise depiction of the financial status of the reporting organization. Statement No. 106 lists the objectives proposed/used by the Financial Accounting Standards Board. http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010215 b) Identify which accounting pronouncement specifically observes: This Statement relies on a basic premise of generally accepted accounting principles that accrual accounting provides more relevant and useful information than does cash basis accounting. This statement is part of the Financial Accounting Standards Boards Statement of Financial Accounting Standard No. 106, which challenges Employees Accounting for Postretirement Benefits Other Than Pensions, this Statement was announced in 1990. http://www.fasb.org/jsp/FASB/Pronouncement_C/SummaryPage&cid=900000010215...
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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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...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 have experience of accrual accounting...
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...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 is keeping accounts that includes as income received in cash and as expenses paid in cash. ...
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...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 is keeping accounts that includes as income received in cash and as expenses paid in cash. ...
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