Premium Essay

Cash vs Accrual

In: Business and Management

Submitted By souley350
Words 309
Pages 2
Part I.
A. Generally Accepted Accounting Principles.
GAAP is not a fixed set of rules. It is a guideline or more precisely a group of objectives and concepts that have evolved over 500 years from the basic concepts of Luca Pacioli set forth in the 1400s. It governs how financial statements are prepared and presented in the United States. The Financial Accounting Standards Boards (FASB), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (SEC) provide guidance about acceptable accounting practices. Some of the reasons we use GAAP are that any business that expects anyone from outside their company to look at their financial data needs to use GAAP. Compliance with GAAP helps maintain creditability with creditors and stockholders because it reassures outsiders that a company's financial reports accurately portray their financial position. Additionally anyone who reads your financial statements will automatically assume they are prepared and comply with GAAP. Another reason to use GAAP is that banks and finance companies often require their clients to use GAAP or have audited financial statements. It would be cheaper in the long run to prepare statements using GAAP than pay someone to audit them all the time. Additionally investors who are accustomed to using financial information prepared according to GAAP might balk if your statements don't meet their expectations, which could lead to unhappy investors ultimately leading to a loss of profits. Finally the SEC requires companies to comply with GAAP.
The basic point of the Generally Accepted Accounting Principles is to put everything in one format so that every business is not doing things there own way and it makes it easier for the investment community to read the business's financial statements.
B. Historical Cost.
Historical cost is the actual purchase price plus…...

Similar Documents

Premium Essay

Accounting: Accrual vs Cash

...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...

Words: 544 - Pages: 3

Premium Essay

Accrual Basis of Accounting Versus Cash Basis

...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......

Words: 498 - Pages: 2

Premium Essay

Cash vs Accrual

...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......

Words: 1632 - Pages: 7

Free Essay

Cash Basis vs Accrual Basus

...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......

Words: 460 - Pages: 2

Premium Essay

Cash vs. Accrual Basis

...CASH BASIS, MODIFIED CASH BASIS AND ACCRUAL BASIS OF ACCOUNTING Accrual Basis 1. The effects of transactions and other events on the accounts of a business are recognized and reported as they occur regardless of when cash is received or paid. 2. Revenues are recognized and reported when earned regardless of when cash is received. 3. Expenses are normally recognized in the period when it is incurred. 4. Requires recognition of accruals (accrued revenues and expenses) and deferrals (prepaid expenses and unearned income). 5. It attempts to better match revenues and expenses in determining the net income for an accounting period. 6. Adjustments are necessary at the end of the accounting period to update certain assets, liabilities, revenues and expenses. Pure Cash Basis 1. The effects of transactions and other events on the accounts of a business are recognized and reported only in the period when cash is actually received or paid. 2. Revenues are recognized in the period when cash is received irrespective of when earned. 3. Expenses are recognized in the period when cash is paid irrespective of when incurred. 4. There is no need to recognize accruals and deferrals since these items do no involve cash neither receipts nor payments. 5. Receivables are not taken up. 6. Values of inventories are ignored. 7. Property assets are treated as expenses 8. It does not give a good picture of profitability because net income is materially distorted. 9. It is......

Words: 522 - Pages: 3

Premium Essay

Accrual Basis of Accounting over the Cash Basis

...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......

Words: 575 - Pages: 3

Premium Essay

Accural vs. Cash Basis Accounting

...Accrual vs. Cash Basis Accounting XXXXXXXXXX ACC290 XXXXX, XX, XXXX XXXXXX XXXXXX Introduction In business, there are many different forms and standards to accounting. These standards are governed by rules, laws, regulations and accurate accountability of a particular business account. There are some general differences between general and commercial basis accounting principles, also differences between accrual and cash basis accounting. Those differences will be looked at here. General and Commercial Basis Accounting Principles According to Wikipedia.com, generally accepted accounting principles (GAAP) refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. These include the standards, conventions, and rules that accountants follow in recording and summarizing and in the preparation of financial statements. Hubpages.com discusses commercial accounting, also known as profit accounting, defining that it performs primarily by profit and loss. The reporting for a profit organization is directed to the investors. ("The Principles Of Commercial Accounting And Fund Accounting", 2011). Accrual vs. Cash Basis Accounting According to the readings, accrual basis accounting is defined as 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. In other......

Words: 413 - Pages: 2

Premium Essay

Accrual and Cash Accounting

...Accrual and Cash Accounting ACC 290 The biggest difference between accrual and cash basis accounting is the timing in which the revenues or expenses are recognized. Cash basis accounting is used mostly by small businesses or personal finances. The cash basis method accounts for revenue only when money is received or expenses only when money is paid out. For example, when you balance your checkbook, you only enter your paycheck when it is deposited into the bank, and when you write a check to pay a bill, you subtract that sum from your account. The accrual accounting method accounts for revenue when it is earned and for expenses, goods and services when they are performed. Revenue is recognized even if no cash has been received or, in the case of an expense, that has been incurred, no cash has been paid out, and it is the most common method used by businesses today. Let’s say you sell $10,000 worth of goods, under the cash basis method the amount id not entered in to the books until the money has been collected or a check is received. With the accrual accounting method, the $10,000 is recorded as revenue as soon as the sale is made. This is the same for expenses. If you get an electric bill for $1,500, using the cach basis method, it is not entered in to the books until the bill is paid. Under the accrual accounting method, it is entered as an expense as soon as it is received. (Morah, C. 2009) Accountants use the Generally Accepted Accounting Principles (GAAP) to......

Words: 426 - Pages: 2

Premium Essay

Accrual and Cash Accounting

...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......

Words: 592 - Pages: 3

Free Essay

Accrual and Cash Basis Accounting

...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.,......

Words: 268 - Pages: 2

Premium Essay

Cash vs Accrual Accounting

...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......

Words: 343 - Pages: 2

Premium Essay

Accrual vs Cash

...Differences of Accrual and Cash Basis Cesar Roldan ACC/290 3/9/2014 Walter A. Corrigan Introduction Accounting and bookkeeping is part of the foundation to any business, small or large, family business or public corporation, accounting is necessary. Before invemtory takes place, before any transations are processed the business must determine what basis suits the business better, the accrual basis or the cash basis. Deciding what basis to use is simple after understanding their functions and how it can influence the business bookkeeping. One of the main differences between these two basis is the timing of when transactions are recorded, in accrual basis the transaction or revenue is recorded at the time the transaction is made whether there was any cash payment involved or not. In cash basis transactions are recorded only when payment is final, or when cash is paid out. “For example: Let's say you own a business that sells machinery. If you sell $5,000 worth of machinery, under the cash method, that amount is not recorded in the books until the customer hands you the money or you receive the check. Under the accrual method, the $5000 is recorded as revenue immediately when the sale is made, even if you receive the money a few days or weeks later. The same thing occurs for expenses. If you get an electric bill for $1700, under the cash method, the amount is not added to the books until you actually pay the bill. However, under the accrual method, the $1700 is......

Words: 474 - Pages: 2

Premium Essay

Week 3 Accrual and Cash Xacc/290

...Accrual and Cash Accounting 10/18/2015 XACC/290 Accrual and cash accounting are both beneficial to businesses; however, there are different reasons to you each one. Cash accounting is mostly used by small businesses and for personal finances. Cash accounting keeps track of money only when it is received and paid out. It does not recognize any accrued revenues or expenses because cash was not paid during a period. Accrual accounting keeps track of money when it is earned even if cash has been received yet; it also keeps track of expenses and services when they are incurred even if no money has been paid. Companies are allowed to use cash based accounting for internal purposes and some small businesses are allowed to use cash based accounting when filing for taxes. Otherwise businesses are not allowed to use the cash based accounting because it goes against the GAAP because it doesn’t reflect the company performance or financial status. It also violates the matching principle and time period principle. The Accrual method is preferred because it gives a better picture of how the company is doing financially to give the company a better picture of what they need to do to improve. References Accounting Coach. (2004-2015). Retrieved from http://www.accountingcoach.com/blog/cash-basis-accrual-basis-of-accounting Cash Basis Accounting. (2015). Retrieved from http://www.myaccountingcourse.com/accounting-dictionary/cash-basis-accounting University of Phoenix. (2015).......

Words: 250 - Pages: 1

Premium Essay

Cash and Accrual Basis

...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......

Words: 486 - Pages: 2

Premium Essay

Adjustments and Accrual and Cash Basis Accounting

...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 ....

Words: 388 - Pages: 2