Sunday, January 23, 2011
Cash And Accrual Accounting
Today we are talking about Cash And Accrual Accounting in detail, let's first we talk about some basics of Accrual Accounting.
Accrual Accounting Basics:
This is the method by which revenues are recorded when earned, and
expenses are recorded when they are incurred, as opposed to a cash-basis
method of accounting that measures revenue when cash is received and
expenses when they are paid. The accrual method must be used for financial
statements to be considered prepared according to Generally Accepted
Accounting Principles (GAAP).
Accrual vs. Cash Basis Accounting
When working with basic small business financial statements, the
accrual concept is easy to understand. However, in more complex
business environments accrual accounting can become as exacting and
tedious in its application as nuclear physics.Fortunately, we are going
to be discussing the former, not the latter.
You have read the definition of accrual vs. cash (above) so let’s use
one of the most common examples of accrual accounting found in small
businesses, i.e., Accounts Receivable and Accounts Payable. First, you
must be familiar with how debits and credits work.
Which one is better?.... It is not a question of better, it is a question
of accuracy. If you include all accrual transactions on your books, the reader
will have a more complete understanding of what is going on in your business
than if only Cash transactions are recorded. Think about it with our examples.
The Accrual transactions would show more Assets, more Liabilities and more
Revenue than the strictly Cash transactions. This reflects all the activity
going on instead of just a portion. This is why the Financial Accounting
Standards Board (FASB) requires that financial statements that are prepared
using Generally Accepted Accounting Principles (GAAP) use the Accrual
method of accounting.