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Cash vs. Accruals: Is There a Difference in Recognizing Transactions?
Finance & Accounting
Pages 4 (1004 words)
CASH VS. ACCRUALS: IS THERE A DIFFERENCE IN RECORGNIZING TRANSACTIONS? Name Course Tutor name 01 March 2012 CASH VS. ACCRUALS: IS THERE A DIFFERENCE IN RECORGNIZING TRANSACTIONS? Introduction Processes in business enterprises involve dealings between an enterprise and its suppliers and consumers of goods and services.
Such incorporation of monetary value can be done on either cash or accrual basis. This paper seeks to investigate the differences between cash and accrual recognition of transactions. The paper will explore elements and principles that are involved in the two approaches to recognition. Cash method The cash approach to accounting recognizes transactions when money is transferred between parties. A transaction is therefore not considered to have occurred unless money has been transferred from one party to another. This means that credit sales by an enterprise will not be recorded as a transaction until that time when the debtors remits their payments. Similarly, credit purchases are not considered until the time when the organization pays for its debts. The same treatment applies to accruals and prepayments that are not recognized as bases for transactions because money is not transferred in the processes. Other accounting treatments that do not involve real flow of money into the enterprise or out of the enterprise are also not recognized under the cash recognition approach. The cash approach to accounting therefore does not recognize depreciation on assets as an item of financial transaction (Allen, 2011). ...
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