Cash Versus Accrual Accounting

Cash versus Accrual Accounting

Most businesses have their method on how they maintain and keep track of the business's financial records. The type of accounting method that a business uses will determine how they will keep track of their financial records. There are two accepted accounting methods; cash basis and accrual basis. A big difference between cash basis and accrual basis accounting are when transactions are posted to an account (Accrual Accounting, 1999). This will play a big role on how business' financial reports are interpreted.

Accrual based accounting suggests that businesses register in the segments in which the actions happen, actions that modify businesses monetary statements still if cash has not swap. An advantage of accrual accounting is that it is effective for business by giving an accurate picture of the business's profitability on a regular basis. Management can better assess the business profit levels by matching income to expenses.

Underneath the cash basis, businesses document dealings only in the segments in which the businesses receives or disburse money. Cash basis accounting, in which a business reports revenue only when it collects cash and an expense only when it disburses out cash. An advantage of cash basis accounting is that it gives the businesses a much accurate picture of cash flow in where income is not subjected to taxation until money is exchanged (Accounting Methods, 2012). Some disadvantages of cash basis are it can lead to distortions due to the collection of cash during the timing of sales. Although cash basis may provide a more accurate picture of how much cash the business has, it may mislead the business of the long term profitability.

While both accounting methods are acceptable, accrual basis accounting follows the guidelines of the generally accepted accounting principles. (Accrual Accounting, 1999).