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 between cash versus accrual for an organization can be substantial.
Supposed you are a company that consults to Oil and Gas industry and your income is derived from consultants. In the month of February you received expenses from consultants of $40,000. Paid out for overhead and re-occurring expenses $8,000. Billed clients for services in the amount of $80,000, received $8,000 for