Cash and Accrual Basis Accounting Essay

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The major difference between cash and accrual basis accounting lies in when the expenses and revenues are recorded or recognized. The cash basis method accounts for revenues when money is actually received regardless of when the invoice was issued. Expenses on the cash basis accounting method are recorded when they are paid out and not when they were invoiced. The cash basis method is mostly used for personal finances and by small businesses. A good example for illustrating the cash basis method is a company could perform some work in a given year and receive payment in the following year. Using the cash basis method, the company would not report or record the revenue in the year the work was done, but rather it would record the revenue in the year the cash was actually received. Since the cash basis method of accounting does not match revenues earned and expenses incurred in the year they actually occurred, it does not follow the Generally Accepted Accounting Principles (GAAP). A company that uses the cash basis method of accounting does not have to prepare any adjusting entries, not unless the company discovers there was a mistake done when preparing an entry during the accounting year.

This accounting method is used by many companies.

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The accrual basis method accounts for revenue when it is earned and not when the cash is received. Expenses are recorded when they take place regardless if cash has been paid or not (Diamond, 2002). It should be noted that although the company has not received any cash, the revenues is recorded when the company performs a service or sells goods, Later, the company will not record the revenue when cash is received because the company had recorded the revenue earlier. The same applies for expenses, the expense is recorded, and when the actual cash is paid there is no need for recording it again. For example, a company that performs some work in a given year and receive payment the following year. Under the accrual basis method, the revenue for the work done would be recorded in the year the work is done, not when the payment is received. When using the accrual basis method, the adjustment of entries is necessary to ensure that accounts are up to date and any unrecorded activity is captured. The accrual basis method is the recommended and required method for accounting for….....

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References

Diamond, J. (2002). Performance Budgeting Is Accrual Accounting Required? IMF Working Paper, Available at SSRN: https://ssrn.com/abstract=880949, 1-31.

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