Name: Professor: Course: Date: Introduction The goal of the company is to have a profitable business that maximizes the profit, and make sure they prepare and keep their financial report. There are two significant accounting techniques that are utilized to maintain recording of the business…
Meanwhile, accrual basis is accounting techniques that transactions are recognized when item is delivered, and revenues are recorded when they are earned. Although, the two methods are both accounting method and used to record transactions, they are different in various ways and the paper will evaluate the difference of the two accounting methods used to recognize transactions. Cash vs. accrual accounting Accrual-basis financial statements give more practical information than cash-basis statements because the accrual-basis is a method that is recognized by the generally accepted accounting principles (GAAP). However, the cash basis statement is not useful as accrual basis because it is not recognized by the GAAP. Meanwhile, the accrual basis ensures firms have recorded transaction in the period that the event has occurred. For instance, to establish the net income it will require the company to recognize revenue when it was earned but not when it received the cash. Meanwhile, the company under the accrual basis will recognize the expenses at the period when they are incurred and not the period when they are paid. Conversely, the companies that use cash basis accounting can record revenues when they get cash, and record an expense when they pay out cash. Although, cash basis seems appealing because of its simplicity, it frequently generates false financial statements (Diamond, 2006). Meanwhile, cash basis fails to record revenue that the company has earned and instead opt to record revenue that it has received the cash. Meanwhile, the accrual basis matches expenses with earned revenues, but cash basis does not match the expenses with earned revenues. Cash basis is recommendable for the small firms because they do not prepare detailed receivables and payables, but accrual basis accounting is mostly utilized by large businesses. Conversely, companies that use the accrual method to make adjustment entries for accruals will record revenue earned in the recent accounting period (Diamond, 2006). Adjusting entries under an accrual method maintains two purposes that include showing the receivables. This exists in the balance sheet and involves recording the revenues earned during the period. Meanwhile, before the adjustment is done under the accrual method, assets and revenues are understated. Under the cash method, before the adjustment entries are performed for the prepaid expenses, assets are overstated, and expenses are understated. Moreover, many small businesses use the cash method for recognizing transaction because it offers flexibility in managing taxable income used in the running of the business. In contrast to cash basis methods, accrual methods will record transactions that are made, and most of the companies use the method (Biafore, 2010). The accrual method offers better matching between revenues and their related cost that assist firms understand the true causes and effects of various business activities. Consequently, revenues are recognized during the same period in which sales transactions occurred, and expenses are recognized in the same period as their linked revenues. However, the two accounting methods are used to recognize the transactions ...
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(Cash and Accrual Accounting Essay Example | Topics and Well Written Essays - 1250 Words)
“Cash and Accrual Accounting Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.net/finance-accounting/9552-accounting.
l accounting are the two basic accounting methods used to track the income and expense of a business concern. Precisely speaking, these two methods are only different from each other on the timing they are debited or credited to the business accounts. In cash accounting method, the income is considered when cash is received and expense is considered when cash is paid in real.
Accrual Accounting Cash basis accounting is one of the most important accounting methods, which is generally used for the reporting and recording of the expenses and incomes of small business organisations. In the ‘cash accounting method’ the expenses and the incomes are recorded or reported only after the funds are distributed or received.
This method measures a company’s position and performance through recognizing economic activities regardless of the time cash transactions will take place. On the other hand, the cash accounting process differs because it recognizes revenue and expenditure only when cash is received or paid out for transactions (Palmer, Coombs & Smith, 1999).
While the transition requires careful organisational planning and employee training in the use of the new accounting system, doing so will definitely enhance organisational performance and aid in the articulation and attainment of strategic goals.
mathematician Luca Pacioli who first introduced the concept of a double entry system in his book Summa de Arithmetica, Geometria, Proportione ET Proportionelite. For over 500 years accounting has served an instrumental role in the business development of firms throughout the
With the help of the cash accounting method any organization can identify its exact cash flow, provided if the company has entered each and every transaction in the account. Cash accounting method is comparatively easy to
In the balance sheet, the accumulated depreciation was reported as a deduction from the total cost of Property, Plant, and Equipment.
d) In the year ending 2009, the income taxed paid were $22.364mn as