...Week Three Accrual and Cash Basis Bi-Le’ DeRouen ACC/290 November 1, 2012 Dana Babin Week Three Accrual and Cash Basis Both cash basis of accounting and accrual basis of accounting can be the best of both worlds when using software. However to prefer one over the other to ensure the most advantage way can be a bit of a trick. Determining the differences between the two bases will be established. In the event an accountant decides accrual basis over cash basis he or she understand transactions that charge an organization’s financial statements are recorded in the time period in which the events occur, even if currency was not received. Receivables are recorded if payment is not received at the point of sale, revenues and expenses will be recorded in full, payables are recorded whether payment is made or not at the purchase time, and it is important to know that organizations and companies recognize expenses when incurred. Compared to cash basis accounting, companies and organizations record revenue only when currency is received, and also recording expense when cash is salaried. When using cash basis the accountant is not to record expense when incurred nor is he or she to record revenue when earned. The cash basis is prohibited under (GAAP) generally accepted accounting principles (“Understanding Cash and Accrual Basis Accounting “, 2012). Cash basis can be quicker and easier to use versus accrual. It is very simple, when funds are available to pay bills checks...
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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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...Topic: Cash basis versus Accrual basis of accounting The cash basis of accounting, sometimes called cash accounting, is still used by some small companies whose business activity is uniform throughout the year--receiving and disbursing roughly the same amount of cash each month. Many individuals also use cash accounting.( Edmonds, McNair, Milam, and Olds, Fundamental Financial Accounting Concepts, 4th edition, McGraw-Hill Irwin, 2002) In the cash basis of accounting, the business records are "cash in" (deposits to the bank account) called cash receipts, and "cash out" (checks) called cash disbursements. Cash receipts - Cash disbursement = Cash flow. Each month's cash flow is added to the preceding month's cash balance yielding the current month’s cash balance. The cash basis of accounting is more likely to be used by service businesses than by retail or manufacturing businesses. Service businesses usually do not need equipment and can sell a service they perform with nothing more than their own hands and minds. Think of people who are lawyers, writers, public relations and advertising personnel, and accountants. There are two problems with cash accounting: 1) A business has difficulty in determining if it is earning a profit unless it is a small service business that does not own any property or equipment and does not have a number of contracts in progress, and 2) A business cannot keep track of any asset except cash. The cash basis of accounting does a poor job of...
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...Topic: Cash basis versus Accrual basis of accounting The cash basis of accounting, sometimes called cash accounting, is still used by some small companies whose business activity is uniform throughout the year--receiving and disbursing roughly the same amount of cash each month. Many individuals also use cash accounting.( Edmonds, McNair, Milam, and Olds, Fundamental Financial Accounting Concepts, 4th edition, McGraw-Hill Irwin, 2002) In the cash basis of accounting, the business records are "cash in" (deposits to the bank account) called cash receipts, and "cash out" (checks) called cash disbursements. Cash receipts - Cash disbursement = Cash flow. Each month's cash flow is added to the preceding month's cash balance yielding the current month’s cash balance. The cash basis of accounting is more likely to be used by service businesses than by retail or manufacturing businesses. Service businesses usually do not need equipment and can sell a service they perform with nothing more than their own hands and minds. Think of people who are lawyers, writers, public relations and advertising personnel, and accountants. There are two problems with cash accounting: 1) A business has difficulty in determining if it is earning a profit unless it is a small service business that does not own any property or equipment and does not have a number of contracts in progress, and 2) A business cannot keep track of any asset except cash. The cash basis of accounting does a poor job of...
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...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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...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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...Accrual versus Cash Basis Accounting Sandra Fletcher ACC/290 March 6th, 2012 Bryan Carey Accrual versus Cash Basis Accounting Commercial accounting and general accepted accounting principles, generally prescribe the accrual basis of accounting over the cash basis. Because there are many benefits of the accrual basis accounting including, forecasting and invoices recognition this method is most used. Accrual basis accounting means a company recognizes revenue when earned while cash is still pending or not yet received. The matching principle is used to recognize expenses when incurred even when the cash is not yet received. Under the cash basis accounting, companies record revenue only when the cash is received and record expenses only when the cash is paid out. The cash basis of accounting is prohibited under the generally accepted accounting principles because it does not record revenue when revenue is earned. In response this violates the revenue recognition principle and it does not record expenses when incurred, in turn violates the matching principle. Timing plays a large role in these practices. One key method of accounting is recognizing income and expenses. The basic difference between cash and accrual methods of accounting is related to when the revenue and expenses are recognized. Cash basis recognizes revenue when money comes in and recognizes expenses when money is paid out. Cash basis doesn’t recognize accounts receivable or payable. Hence, the difference...
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...ACC 502 DE Siriwisa Inma Forum # 1 Topic 1: Distinguish accrual accounting from cash basis of accounting, and explain how accrual accounting is accomplished. Discuss whether accrual accounting is more closely related to a company's goal of profitability or liquidity. Enterprise funds and internal service funds use full accrual accounting in order to determine full cost - that is both operating costs and capital costs. Having full costs enables managers of these entities to have appropriate data for determining user charges. An Accrual Accounting system, depreciation is a method of allocating the expense of the purchase of a long-term asset over the life of the asset. Conversely, under a cash accounting system, you would recognize expenses on the purchase of long-term assets as you pay cash for them. Under an accrual system, you first capitalize the asset on your balance sheet by debiting your asset (such as equipment or a building), and crediting cash or accounts payable by the same amount. Over the useful life of the asset, you would systematically depreciate it in a way that you feel best reflects the way the asset is used. While the simplest depreciation method is straight-line, there are many different methods out there. At the end of the period, you debit depreciation expense for the amount incurred, and credits accumulate depreciation for the same amount. This recognizes an expense for the current period, while concurrently reducing the carrying value of the asset. Once...
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...acc Accrual V.S. Cash Accounting Miguel Gonzalez ACC/290 August 3, 2012 Dr. Dorothy Welch In this assignment, I will describe the cash basis of accounting and the accrual basis of accounting and will explain the difference. Cash Basis accounting is the easy and less expensive method of accounting. In this method of accounting, cash is recognized when the physical cash transaction occurs. Thus, this method does not recognize payables, receivables, and prepaid expenses. Additionally, cash basis accounting does not comply with the revenue recognition principle and the matching principle. In accrual basis of accounting, revenue is recognized when it is earned and expenses are recognized when they are incurred. Susan Ward states, “Accrual basis accounting gives the most accurate picture of the financial state of your business.” We are essentially keeping track of the most current business practices, such as to who owes who money, and service. When the customer owes us money, we create an accounts receivable. When we owe money we create an accounts payable. When we pay cash before an expense we create a deferred expense account. There are key differences between the methods of accounting. In cash basis, taxable income may be deferred to the next year due to delays in billing. However, in accrual basis, the company might have to pay taxes on income before payment is received. Under the cash basis method, there is no company...
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...• What is the difference between accrual-basis accounting and cash-basis accounting? The difference between the two types of accounting is when revenues and expenses are recorded. 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. • Why would politicians prefer the cash basis to the accrual basis? Politicians prefer cash basis because they can tax a higher percentage. Politicians like cash-basis better than accrual basis because it is an easy method to keep track of income and expenses. This system used for income tax purposes and makes businesses declined in value. The accrual-basis is revenue recognized when earned. • Write a letter to your senator explaining why the federal government should adopt the accrual basis of accounting. March 25, 2011 440 Louisiana, Houston, Texas 77002 Dear Senator Ellis: The purpose of this letter is to address why the Federal Government should adopt the accrual basis of accounting system. Viewpoints of the benefits of accrual basis accounting are • Helps in compare performance and stability from one reporting period to the next • Tends to overstate revenue • Focus on the outputs of a business rather than inputs • Improved accountability • Provides tracking accounts receivable and payable more...
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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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...PUBLIC SECTOR ACCOUNTING AND FINANCE 1.0. Introduction: One of the main distinguishing factors between public and private sector organisations lies in their objectives and sometimes funding structure. While public sector bodies have a more social objective and focus more on the allocation or distribution of public goods and services within the country, private sector bodies have the main objective of increasing the wealth of their shareholders (IFAC, 2011). However, both private and public sector bodies face similar operational and business challenges brought on by the economic environment and climate. A crucial question therefore is how to account for the activities of private sector bodies and public sector bodies in a way that reflects the operational structure of the organisation and yet their varying objectives (Barton, 2000). There exist two main schools of thought on the nature of accounting in the public sector, each of which is formulated by the view of the role of the public sector within the economy (Evans, 1995). The traditional method of accounting within public sector organisations has often advocated the use of the cash basis of accounting, with larger emphasis rather placed on compliance with the rules and regulations governing the sector (Wynne, 2003). However, weaknesses in public sector management have brought to the fore the importance of efficiency and hence the adoption of the accrual method of accounting within the public sector. According to...
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...Accrual Basis Of Accounting Over Cash Basis This paper will analyze accounting cash basis and accrual basis. It will also show how they are different.Cash-basis accounting is known to record all transactions. Now when cash tends in changing which means when revenue is received in paying out by the company. A payment or a cash receipt may be in a form of, credit card or even electronic transfer which that item is then paid.Cash basis is mainly used by a smaller businesses in which a creditor may want to understand the financial statements in a easier way. The way cash basis gets used is when a creditor wants to understand if they profit or loss in that company and accuracy of statements if something they don't worry about. When the cash is payment the revenue gets recorded but when it is received then after the expenses follow. Accrual basis accountings known when the revenue is earned, and expenses accrued. In accrual accounting, even if there's no cash changes you must then record all occurred transactions in the book. Like for instance, if one decides to sell on store credit, your transaction must be recorded right then and input it in an accounts receivable account until that payments gets received. Or if you decide to buy good on credit, you have to then right after input that transaction in a accounts payable until that cash is paid out.Accrual basis accounting is known to be used by the large businesses in the United States, and even in some t foreign...
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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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...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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