Accrual and Cash Basis Accounting

Accrual and Cash Basis Accounting

With in all businesses everyone needs feedback to see how they are doing so they will know where they stand to determine if there any changes if necessary. The methods that are used to keep the businesses income and expenses on track are Cash basis accounting and the Accrual basis accounting. These two methods are very different from each other, one is much more expensive and difficult and it is the only one that is recognized and accepted by the (GAAP) generally accepted accounting principle.

ACCRUAL BASIS OF ACCOUNTING - In which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged. This is the method that recognizes revenue when it is earned and when it is realized. Additional accounts must be created to record the difference between the recognition of revenue or expenses and the receipt and disbursement of cash. This method it makes the cash inflows and outflows possible to join with the cash inflow and outflow of expected, which paints a definitive picture of a company's current financial condition. Accrual accounting is the preferred method of accounting, as it relates to GAAP.

CASH BASIS OF ACCOUNTING - this is a method that the receipts of cash and the payments of cash are recorded. Under this method the revenue is recognized when the cash is received and disbursed. Cash basis accounting is very different from accrual basis accounting, because it is only recognizes when the income payment is received and when the expenses are made. In this method there is no way to fix the accounting period because there is no way to match the revenue against the expenses. Many small businesses and sole proprietorships that do not carry inventory use this method of accounting. This method is less expensive and it is not as difficult to implement as the accrual method, this is easier because the actual flow of cash that goes in and out the business is what is kept on books.

Both methods Accrual accounting and Cash accounting are extremely important to the company's whether they choose either one, Accrual accounting gives accurate account of the finances of the company and the Cash accounting it give you what is on hand and what was paid out.