Accrual Vs. Cash – Accounting Effect
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Accrual vs. Cash
Accrual vs. Cash
The two basis in accounting are cash and accrual. They basically are two different ways to journalize and record on the accounting books. Accrual basis record transactions at the time it is earned or recieved. It gives an accuarate amount if each transaction that takes place. However, cash basis record transaction before it is earned or recieved. Cash basis record the transactions in advance before cash is received or services is provided. Commercial and generally accepted accounting principles are two different types of accounting, but both types prefer the accrual basis over the cash basis. Most businesses prefer or requires accrual basis because it gives an accurate financial report for the business.
The two types of accounting are the general accepted accounting principles (GAAP) and commercial accounting. The general accepting accounting principle is a framework of financial operation guidelines used by most publicly traded companies. It is the accounting rules that show how to prepare the financial statements. Commercial accounting uses double book entry records to measure the performance of the company by gain and profit loss. It measures the products and divisions to give a accurate reflection of the business transactions. Both types of accounting prefers the accrual basis because it supports risk-management efforts while making that assets and liabilities are recognized and documented.
The difference between the two bases are that cash basis records transaction before completed and accrual recorded transactions at the specific time it is completed. “The cash accounting supports financial accountability , accrual accounting provides the means not only to gauge an organizations financial position but also its operating efficiencies through the documentation of assets and liabilities as well as operating costs,” ( Nordmeyer, 1999-2012). Even though, it is preferred, accrual basis, is more costly than cash basis and requires additional entries in the accounting book. Companies will spend the extra money and even risk getting taxed on reported revenue by using accrual basis, because they know they will not go wrong and right information about the companys financial stability.
In conclusion, the accrual and cash are two basis of accounting that are designed differently.”The accrual accounting requires the recognition of income when earned and expenses when inccurred versus the cash basis of accounting which requires you to recognize income when recieved and expenses when paid,” ( Morris, 1999-2012). Commercial and generally accepted accounting