Accrual and Cash Basis Accounting

Accrual and Cash Basis Accounting

Dana M Hurt Sr.

ACC/290

April 10, 2012

Ben Douglas

Accrual and Cash Basis Accounting

Accrual basis accounting is a "system of accounting based on the accrual principal, under which revenue is recognized (recorded) when earned, and expenses are recognized when incurred." (businessdictionary.com, n.d.) Although cash basis accounting is "an accounting method in which income is recorded when cash is received, and expenses are recorded when cash is paid out." (businessdictionary.com, n.d.) These two forms of accounting are very different from each other but can be used effectively, depending on the size of the business and whether or not the organization has to follow generally accepted accounting principles (GAAP). Below is a chart that displays some of the differences of the two:

Cash basis Accrual basis

Revenues are recorded when they are received, which may be before or after they are earned. Revenues are recorded when they are earned, which may be before or after they are received.

Expenses are recorded when they are paid, which may be before or after they are incurred. Expenses are recorded when they are incurred, which may be before or after they are paid.

Financial statements reflect revenues and expenses based on when transactions were entered rather than when revenues were earned or expenses incurred. Financial statements match revenues to the expenses incurred in earning them, and more accurately reflect the results of operations.

No receivables are recorded. A receivable is recorded when payment is not received at the point of sale.

No payables are recorded. Payables are recorded when payment is not made at the time of purchase.

No method of tracking partial payments is available. Revenues and expenses are recorded in full, even though partial payments may be made over extended time periods.

(Snyder, CPA, n.d.)

Accrual basis accounting is GAAP approved and used by small to large businesses because of its ability to match revenues and expenses to the time they were earned or incurred. Accrual basis accounting figuratively places a time stamp on revenues as they are earned and expenses when they are incurred. Accrual basis accounting does involve more steps and a greater knowledge of accounting than cash basis accounting. Enabling businesses to follow accounts payable and accounts receivable will allow a better understanding of a business's financial standings that will produce more detailed financial statements