...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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...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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...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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...Accrual and Cash Accounting ACC 290 The biggest difference between accrual and cash basis accounting is the timing in which the revenues or expenses are recognized. Cash basis accounting is used mostly by small businesses or personal finances. The cash basis method accounts for revenue only when money is received or expenses only when money is paid out. For example, when you balance your checkbook, you only enter your paycheck when it is deposited into the bank, and when you write a check to pay a bill, you subtract that sum from your account. The accrual accounting method accounts for revenue when it is earned and for expenses, goods and services when they are performed. Revenue is recognized even if no cash has been received or, in the case of an expense, that has been incurred, no cash has been paid out, and it is the most common method used by businesses today. Let’s say you sell $10,000 worth of goods, under the cash basis method the amount id not entered in to the books until the money has been collected or a check is received. With the accrual accounting method, the $10,000 is recorded as revenue as soon as the sale is made. This is the same for expenses. If you get an electric bill for $1,500, using the cach basis method, it is not entered in to the books until the bill is paid. Under the accrual accounting method, it is entered as an expense as soon as it is received. (Morah, C. 2009) Accountants use the Generally Accepted Accounting Principles (GAAP) to guide...
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...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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...between Cash and Accrual Accounting: The cash basis of accounting, simply as the name suggests, records financial information on the basis of the actual cash movement. Revenues to be recognized when cash received and expenses to be recognized when cash paid out. Cash basis is normally adapted by small businesses mainly traders as it is quite easy, straightforward and can easily be set up and maintained without following a lot of complex accounting rules. Care must be taken when using financial statements prepared under the cash basis as it is not completely accurate e.g cash outflows due to purchases of fixed assets would only affect the period they are recorded in though they are to be used over a certain period of time, concepts such as depreciation are used under the accrual system to overcome such disruptions. The accruals basis of accounting which is a more sophisticated method recognizes revenues when “earned” and expenses recorded when “incurred” regardless of the cash movements relating to each. For e.g. in the case of a service business providing a service will recognize its revenue once the job is completed even if the customer hasn’t cleared the dues yet. Same approach is used for the expenses, recorded when incurred not when paid. Accrual accounting method improves the reported information by presenting a more realistic and accurate view of the underlying operations primarily matching reported income with reported expenses in a specific period. When cash basis can be...
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...Accounting: Accrual versus Cash Zachary Ingwaldson ACC 290 October 14, 2012 Tamyra Ford Accrual vs. Cash Accounting departments are responsible for the documentation and upkeep of transactions that pertain to business needs, development, and sustainability. Businesses such as non-profit, small, and large corporations may use different platforms to perform the transaction accountability necessary. Most notably, many profitable businesses use either the accrual bases or cash bases with a preference for the accrual. The following will describe the two recording statements mentioned and the differences between them. Examples of company preference regarding the accrual method will also be examined. Cash Basis Accounting The cash basis of accounting is generally used for companies that document transactions when cash is received for a good or service already performed. Likewise, a transaction is not documented as a liability or credit until the bill or payable expense is complete. However, according to the book Financial Accounting: Tools for Decision Making, the cash basis of accounting is generally “prohibited under generally accepted accounting principles because it does not record revenue when earned” (Kimmel, Weygandt, & Kieso, 2009, p. 164). This practice does not reflect expenses incurred which is also a violation of the matching principle. An example of cash basis accounting is completing a...
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...“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...
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...Hurdle: Accrual vs. Cash Nuts & Bolts: Two types of accounting system: • Accrual accounting • Cash accounting Concept Smart: Accrual accounting measure a company's profit or loss by subtracting the expenses incurred from the revenues earned. The two words “incurred” and “earned” are quite important to understand. Under this accounting practice, revenues are recorded into the financial records as soon as the services are performed or goods are delivered, no matter whether the payment is received from the clients or not. If you have “earned” it, you better record it. On the other hand, based on the matching principle, expenses are entered into the financial system to the extent; they are utilised in order to generate the recognised revenue as above. No matter whether the payment has been made or not, if you have “incurred” it, you need to book it. It is slightly complicated and requires time and money to implement it. However, it tells the real financial situation of the company and shows to the owners the overall profitability of its operation. Cash accounting method has a completely different viewpoint. It states that revenues to be recorded when cash is “received” from customers, no matter when the service is performed or goods delivered. On the other hand, expenses need to be booked when cash is actually “paid," no matter when it is incurred. This method is easy to understand and consumes fewer resources. It paints an accurate picture of the cash appetite...
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...information portrayed by the financial statements of an organization. In addition, the basic format of the financial statements can disclose additional considerations of the business, as will be discussed in the analysis of three major businesses within this paper. Information for the analysis portion was retrieved from the financial statements included in the assignment. Keywords: Accrual Basis Accounting; Cost Basis Accounting; Current Assets and Liabilities; Double Entry Accounting; Financial Accounting Standards Board (FASB); General Accepted Accounting Principles (GAAP); Historic Cost; Non-current Items; Security Exchange Commission (SEC); Financial Statements: Foundational Accounting Principles and Terminology Introduction The basic of understanding of an organizations financial statement requires one to be familiar with fundamental accounting principles. The financial statement of any organization must follow standardized reporting rules, also known as Generally Accepted Accounting including double entry accounting, historical cost, accrual basis accounting, cash basis accounting, in addition to current and non-current revenue and liabilities. The common understanding of these principles will allow a manager to investigate the...
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...indispensible part of today’s economy. It is being used to keep a track of company’s profit or loss, assets, liabilities and owner’s equity. Financial accounting, on the other hand, is to prepare financial reports to external parties such as: investors, creditors, and governmental agencies. However, prior to reporting any information to external users, financial accounting must be completed according to Generally Accepted Accounting Principles guidelines. Identify the hierarchy of sources for generally accepted accounting principles. Generally accepted accounting principles, or GAAP for short, are the accounting rules used to prepare and standardize the reporting of financial statements, such as balance sheets, income statements and cash flow statements, for publicly traded companies and many private companies in the United States (Paul, 2008). The main sources of GAAP are the United States Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), Financial Accounting Standard Board (FASB), Financial Accounting Standards Board (FASB), and the Governmental Accounting Standards Board (GASB). The SEC is a structure for setting accounting standards. The ACIPA created the Accounting Principle Board and serves as an organization to provide CPA services the best professional resources, guidance, and information. The FASB was renewed by the Accounting Principle Board (APB). ACB consists of Financial Accounting Foundation (FAF), the...
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...Direct Vs. Indirect Cash Flow Method A company reports revenues and expenses on its income statement. Since most companies use accrual accounting, the income statement reveals little about cash flowing into and out of the business. To provide an understanding of cash flows, companies turn to the cash flow statement, which includes a section that restates income on a cash basis. You can choose between the direct and indirect methods to report operational cash flow. Cash Flow Statement The statement of cash flows contains sections for three sets of activities: operating, investing and financing. Only the operations section deals with the question of direct versus indirect cash flows. By comparing the operations section with the income statement, you can identify the differences in timing between income and cash collections. Comparison also reveals timing differences between expenses and cash payments. Large differences might indicate that the company is very aggressive in recognizing income, or that the company spends a lot of cash to buy or maintain assets, a fact not apparent from the income statement. Direct Method When using the direct method, you list cash flows in the operations section of the cash flow statement. Cash flows due to operations arise from customer collections and cash paid to suppliers, employees and others. The section also reports cash paid for income tax and interest. The problem in trying to use the direct method is that a company might not keep the...
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...Cash vs Accrual Under the cash basis of accounting… 1. Revenues are reported on the income statement in the period in which the cash is received from customers. 2. Expenses are reported on the income statement when the cash is paid out. Under the accrual basis of accounting… 1. Revenues are reported on the income statement when they are earned—which often occurs before the cash is received from the customers. 2. Expenses are reported on the income statement in the period when they occur or when they expire—which is often in a period different from when the payment is made. The accrual basis of accounting provides a better picture of a company’s profits during an accounting period. The reason is that the income statement prepared under the accrual basis will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues. The accrual basis of accounting also provides a better picture of a company’s financial position at a moment or point in time. The reason is that all assets that were earned are reported and all liabilities that were incurred will be reported. The accrual basis of accounting is required because of the matching principle. The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method accounts for revenue only when the money is...
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...keep financial records, perform internal audits, report and analyze financial information to the management, and advise on taxation matters. Those who are involved in the accounting management field will usually have a good understanding of the accounting process by which data relative to a business are gathered, classified, and set forth in financial reports to fully understand the basis of accounting you must first understand its terminology. For this module case assignment, I will conduct some research on accounting terms and discuss the definitions of these accounting terms that relate to: Generally Accepted Accounting Principles, Contra-Asset Accounts, Historical Cost, Accrual Basis vs. Cash Basis Accounting, and Accounting Standards Codification, and explain why this concept is important to financial statements. I will also describe the general organization of three sets of financial statements from three companies, offer my opinion as to whether Net Income or Cash from Operating Activities is more useful for each of the three companies, predict the companies' future trends using Net Income or Cash Flows, and provide one additional conclusion about each company using information found in the annual report. According to Investopedia, the term, Generally Accepted Accounting Principles (GAAP), “is the common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by...
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...of bookkeeping or accounting makes it easier to accurately prepare financial statements directly from the books of account and detect errors. For example: A company borrows a loan from the bank for 10,000 You would debit cash for 10,000 and credit accounts payable for 10,000 2.) This is very important ... Analyzing and recording (or journalize) a transaction is the first tab for you to complete in your Course Project. It is also the first two steps of the Accounting Cycle. It also gets test time. SO POSTING TO THIS THREAD ... give me THREE of your OWN examples of business transactions, with dollar amounts .... state the transaction that occured and then show me in Journal Entry Form, how you would record each of the three transactions. Mar. 27 received $600 cash from services performed from John and Sons Auto body shop Mar. 30 John and Sons purchased equipment for $800 from Dodge dealer ship. Mar. 31John and Sons borrowed $6000 by signing a note. Date | Description of Accounts | Debits | Credits | Mar. 27 | Cash | $600 | | | Service Revenue | | $600 | Mar. 30 | Equipment | $800 | | | Cash | | $800 | Mar. 31 | Cash | $6000 | | | Notes Payable | | $6000 | 3.) Preparing a Trial Balance Cash | Debit | Credit | 2/1 | | 5000 | 2/4 |...
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