Cash Accounting And Accrual Accounting

Today i am talking about cash accounting and accrual accounting. lets first start with
Cash Accounting.

The cash basis of accounting is the most elementary form of accounting and is typically used by individuals, small businesses, and school districts. Under the cash basis, revenues are recorded when received and expenditures are recorded when monies are paid.


The virtue of cash accounting is its simplicity. As accounting is not performed
until monies are received or spent, the relationship of revenues and expenses
to the accounting period in question is dependent on the actual flow of cash.
This system makes no provision for noncash transactions; therefore, the
accounting reports may provide inadequate information for control purposes
and may limit analysis of the financial condition of the entity.

The modified cash basis of accounting is the cash basis of accounting that
incorporates modifications “having substantial support.” A modification
having substantial support is not clearly defined. However, these
modifications are frequently made to recognize certain transactions on
an accrual basis and, thereby, represent transactions that would be
reported by an entity following General Accepted Accounting Principals
(GAAP). The modifications, however, should not be considered illogical
Districts need to work with their independent auditors to resolve any
questions or issues relating to the modified cash basis of accounting.

Accrual Accounting

Accrual accounting is a system whereby revenues are recognized when
earned and expenditures are recognized in the period incurred, without
regard to the time of receipt or payment of cash. This method of accounting
allows a more accurate evaluation of operations during a given fiscal period.
Accrual accounting may be based on one of two methods: full accrual or
modified accrual.

The term “full accrual” is sometimes employed and can have one of two
meanings. Either an extensive number of categories in both revenues and
expenditures are accrued and/or this activity is continuous (daily) rather
than periodic. Increasing the degree of complexity of financial reporting
creates an associated cost in the posting, recording, and balancing of more
accounts. Full accrual is typically used in enterprise and agency funds as a
number of major items that are considered expenses in a full costing system
(such as depreciation) need to be recognized.

Modified accrual accounting falls between the cash basis and the full accrual
basis and is the most common accrual basis used by school districts. In
modified accrual accounting, most revenues and expenditures may be
handled on a “cash” basis for daily processing and converted to an accrual
basis by periodic adjustments. The determination of how frequently the
adjustments will be made is a value judgment that depends on the
significance of the items, the purposes for the accounting, the need to
reflect the operations of the enterprise, and the associated cost and
complexity of the system.

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.