Week Four Individual Paper
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ACC/290
September XX, 2012
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Week Four Individual Paper
The current reading supports that commercial accounting and generally accepted accounting principles, strongly advise the accrual basis of accounting versus the cash basis of accounting. The accrual basis of accounting confirms that when transactions alter a business’s financial statements they are recorded during the period that the events happened, regardless if there was an exchange of cash or not. An example of the accrual basis would be businesses who recognize revenues earned, regardless if cash was received or not. The accrual basis also recognize when expenses are incurred, even if cash was not paid. The other potential option to the accrual basis is the cash basis. The major difference between the two accounting basis’, is that under the cash basis a business will record their revenue only at the time that cash is received. Additionally, they record expenses only when cash is received. For these reasons, the cash basis of accounting is not allowed under generally accepted accounting principles. This is due to the fact that the cash basis does not record revenue when it is earned, and therefore violates the principle of revenue recognition. At the same time, the cash basis does not allow for recording the expenses as they occur, which is a violation of the matching principle.
The cash basis measures can mislead or misrepresent the true financial picture of a business as demonstrated in the reading regarding the Fresh Colors paints. In the year of 2009, the business incurs and pays at total of 50,000 dollars. The customer receives a bill for 80,000 dollars, and does not pay the bill until 2010. Therefore, when Fresh Colors paint does their reports, they show 30,000 dollars in net income, which indicated the profitability of their efforts during