To account for profit, businesses have an option of choosing between two methods of record keeping; that is the accrual basis method and the accounting basis method. Using one method throughout accounting period and then changing it at the end while determining profit, might introduce a form of biasness and hence resulting in inaccurate figures. The two methods are completely different in terms of how revenue and expenses are recognized and recorded. As a result, the accounting for profit between the two is also poles apart. In the accrual based method, revenues and expenses are recorded once they are earned or incurred regardless of whether a cash transaction has been conducted or not (Mills, Call & Drew 2000). This therefore implies that for the profit of a specific accounting period to be determined or measured, the revenue earned during that period has to be matched with the expenses or the cost incurred while striving to earn that revenue (Anderson 2002). Cash basis accounting diverts from this statement in a number of ways.
Accrual and Cash-based Accounting
As already hinted, how profit for the period is accounted for, spells out the major difference in the two methods. During record keeping, a process that eventually leads to determining the accounting profit, accrual basis of accounting follows to the letter the revenue recognition principle and matching principle. The revenue recognition principle must be in line with accounting period convection. This convection dictates that the life of a business entity can be divided into equal period; along with this the revenue recognition principle directs for revenue to be accounted for in the period which they are earned. At the end of each period, the financial...
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... Similarly expenses cannot be recorded until they are paid for. On the other hand, to fully adhere to the matching principle, revenue and expenses are recorded regardless of whether or not cash transaction is conducted.
Anderson, J 2002, Accrual Accounting versus Cash Based Accounting Concepts, Elsevier,
Carter, M 2008, Accountancy for Small Business, Prantice Hall, N.Y.
Cudia, C 2008, ‘Application of Accrual and Cash Accounting: Implication for Small and Medium Enterprises in Metro Manila’, DLSU Business & Economic Review, vol. 17, no. 1, pp. 23-40.
Loren, A, Nikolai, Bazley, D, & Jones 2009, Intermediate Accounting , 11th ed, Cengage Learning, Natorp Blvd, Mason.
Mills, D, Call, W & Drew, A 2000, Foundation of Accounting, 9th ed, UNSW Press, Sydney.
Sayther, M & Mathieu, M 2003, The Basic Principles of Accounting, McGraw, N.Y.
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