Difference Between Cash And Accrual Accounting

explanatory Essay
1324 words
1324 words

Every small business must make a choice between two accounting methods, the cash method or the accrual method. The difference between the two is how and when you record income and expenses. In the cash vs accrual accounting debate, most experts recommend the accrual method for businesses, however, there are pros and cons to both and ultimately it 's up to you to decide which is right for your business. An accounting method wherein revenues are recognized when cash is received and expenses are recognized when paid. This method is inferior to the accrual basis of accounting where revenues are recognized when they are earned and expenses are matched to revenues or the accounting period when they are incurred (rather than paid). …show more content…

In this essay, the author

  • Explains that the cash method provides an accurate picture of how much cash your business actually has on-hand.
  • Explains that the single-entry system needed for the cash method is an advantage, but it is also a disadvantage.
  • Explains the difference between the cash method and the accrual method, stating the pros and cons of both accounting methods.
  • Explains the accountings matching principle, which requires companies to use the accrual basis of accounting.
  • Explains that gaap is a set of rules, standards, and practices used throughout the accounting industry to prepare and standardize financial statements that are issued outside the company.

Despite this appealing advantage, the financial statements you prepare may not truly reflect your company’s performance for a given period since revenue and expenses related to the same transaction can be reported in two different periods. For example, if you pay most of the expenses related to a specific job at the end of one year but don’t receive payment from your client until the next, your income statements may indicate a big jump in profitability from one year to the next, which can lead to incorrect conclusions. Cash basis accounting tends to be simpler to understand than other accounting methods. If you choose to implement the cash method for your small business, it may not be necessary to seek the help of a professional accountant. The cash method most resembles a cash flow statement. It provides an accurate picture of how much cash your business actually has on-hand. Also, The cash method can be done with a simple single-entry system, so a complex accounting program is not always necessary. (Paychex, …show more content…

This accounting principle requires companies to use the accrual basis of accounting. The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service). Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid at the time the expense was incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in

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