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 focus on accrual accounting. The FASB promotes financial reporting and focuses on accrual accounting because it provides useful information to investors and others who use financial reports. While accrual accounting does seem the best choice for large companies, cash accounting is simple and easy and is better suited for smaller companies.
