...Accrual and Cash Accounting Accrual and Cash Accounting Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011) “Accrual-basis accounting (p. 166) Accounting basis 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.” Accrual accounting is an accounting process that could be properly utilized by a large company. One example is a company that is turning over millions of dollars in revenue yearly. A large company that is generating that much money and turning it around yearly has to maintain large volumes of cash flow. Without the large volume of cash flow, the company would be unable to maintain high volumes. Because of the high cash flow, money is constantly coming in and going back out. One example in today’s market is Wal-Mart/Sam’s Club stores. A company this size can afford to use the accrual method because it does not have to maintain a close watch on how much actual money is in the bank at any given time. The retail company has cash flow to order inventory, make payroll, and pay other bills at any given time. The accrual-basis is a better accounting process because it accurately creates a picture of the actual profits during a given time. It can make for clear tax predictions as well as accurate projections. Averkamp, H. (2014) “The accrual basis of accounting provides a better picture of a company's profits during an accounting period...
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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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...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...
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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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...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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...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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...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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...goal is to make profit and earn money. However, using different accounting systems to record transactions may meet different results in the end of a period. There is a statement that the accounting profit is equal to the incomes earned in the period minus the expenses happened in the period. There are two accounting systems to 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)...
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...“Accounting for Cash Flow throughout the Business Utilizing Accrual Accounting Practices” Group 4 Kesha Smith Dave Rebar Amber Sabrina Tanisorn Ruengpinyophun February 17, 2012 Table of Content I. The Statement of Cash Flow II. The Statement of Cash Flow The statement of cash flow (SCF) is one major part of basic financial statements. The purpose of the SCF is to provide information about the cash receipts and cash disbursements of an enterprise that occurred during a period (Spiceland, Sepe & Tomassini, 2004, p. 198). The SCF reflects the liquidity and solvency position of a company. It provides inside information on the company’s ability to generate cash from its main operations, and it’s an indicator to help give information on future expansion. It also helps gauge the company’s ability to handle cash effectively. An analysis of the SCF will provide the company information on the funds available to help repay debts and repayment of assets (Lamas & Gregorio, 2009, p. 99). There are three primary elements of the SCF, (1) operating activities, (2) investing activities, and (3) financing activities; there are two other requirements: (4) the reconciliation of the net increase or decrease in cash with change in the balance of the cash account and (5) noncash investing and financing activities (Spiceland, Sepe, & Tomassini, 2004, p1188). Let’s get a better insight of the flow of each activity. Operational activities are the inflow...
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...bases of accounting When 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...
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...Case Study: Cash Basis or Accrual Basis? Selina Sanchez Acc 497 February 11, 2016 Donald Autrey Case Study: Cash Basis or Accrual Basis? Use FARS to identify what standard-setters have said as to the superiority of accrual accounting relative to a cash basis. Do you agree with the justification offered for accrual accounting? Explain. The basic goals have not been completely supported in their statements. Accrual accounting and cash basis both have a reason to be in grated. Accrual accounting is favored by FASB as it shows a more specific accounting transcript than cash basis accounting does. Bonus Question: 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 relies on a basic premise of generally accepted accounting principles that accrued accounting provides more relevant and useful information than does cash basis” is located on the FASB pronouncement Summary of Statement No. 106 discussing the “Employers’ Accounting for Postretirement Benefits Other Than Pensions Accounting Theory Issue: When is a “cash-basis method” used within the accounting literature? Do you view such a method as complementary or preferable to accrual accounting in the settings you have identified? The cash-basis-method is only used for small...
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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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...5. Government accounting and the 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...
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...Cash Basis or Accrual Basis Lisa Wilson-Chavez ACC/497 June 13, 2016 Brain Teaser 4: Cash Basis or Accrual Basis The two main methods in accounting used to keep track of income and expenses are the cash basis and the accrual basis. The cash basis is the preferred method in small companies and its income is not counted until cash is received and expenses are not counted until they are paid. When using the accrual basis income is recorded when the order is made or the service occurs, and the same with expenses, they are recorded when the goods or service are received. Smaller companies will use the cash basis of accounting but when their business grows, it is mandatory to use the accrual method if the business has sales of more than $5 million, or if you have inventory and sales of $1 million on an annual basis. Identify What Standard Setters have said as to the superiority of accrual accounting relative to a cash basis. The Financial Accounting Standards Board (FASB) is recognized by the Securities and exchange commision as the accounting standard setter for public companies. The FASB believes that using accrual accounting provides a better picture of a company’s true financial health, and for this reason is a better choice than cash accounting. The FASB is recognized by many organizations as an authoritative entity. Alicia states that in finance literature there seems to be an emphasis on cash and why if cash is so important why does the FASB...
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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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