Cash Basis vs. Accrual Basis Accounting free essay sample

Cash basis accounting and the accrual basis accounting are two accounting methods used to keep track of a business’s income and expenses. In accrual basis accounting, revenue is recorded as it is earned and expenses are recorded when they generate revenue. Under cash basis accounting, only transactions involving increases or decreases of the entity’s cash are recorded. One of the major differences is the reporting of net income and net cash flows from operations. The cash basis is the more commonly used method of accounting by individuals and small businesses with sales of less than $5 million per year whereas accrual basis is used by large companies and is required of corporations whose stock is publicly traded. With accrual basis accounting being more complex, it provides more financial information about a company, therefore, providing more meaningful financial reports. Cash basis accounting is the simple method. It provides a more accurate picture of how much actual cash your business has because it only deals with cash transactions. We will write a custom essay sample on Cash Basis vs. Accrual Basis Accounting or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Companies record transaction when they have an increase or decrease of cash. However, this doesn’t give you a clear picture of a company’s operations and financial performance. In summary, the difference is the timing when transactions, including sales and purchases, are credited or debited to your account. If your business is simple, then cash basis will do, but accrual basis provides the â€Å"big† picture of business operations. Cash Basis vs. Accrual Basis Accounting free essay sample Accrual accounting doesn’t just focus on cash flows, instead, it also reflects other resources that are provided and consumed by business operations during a period. This method measures resources provided by business operations by revenue. The measure of resources used to earn revenues is expenses. The difference between revenues and expenses is net income/loss. Accrual basis net income provides a better measure of performance because it attempts to measure the resource inflows and outflows generated by operations during the reporting period, which may not provide the same amount of cash inflows and outflows. Accruals involve transactions where the cash outflow or inflow takes place in a period after the expense or revenue recognition. â€Å"Selling on credit and projects that provide revenue streams over a long period of time affect the companys financial condition at the point of the transaction. Therefore, it makes sense that such events should also be reflected on the financial statements during the same reporting period that these transactions occur†. We will write a custom essay sample on Cash Basis vs. Accrual Basis Accounting or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page (Investopedia, 2013). While cash basis is the difference between cash receipts and cash disbursements from providing goods and services. For cash basis accounting, a transaction happens only when money is exchanged. â€Å"Revenues are reported on the income statement when cash is received from the customers. Expenses are reported on the income statement when cash is paid out. This is one of the problems with cash basis accounting because adjusting entries help ensure that all revenues earned in a period are recognized in that same period, regardless of when cash is received†. (Averkamp, 2004). For accrual basis accounting, â€Å"revenues are recorded on the income statement when they are earned, which more often than not occurs before cash is received. Expenses are recorded on the income statement in the period when they occur/expire which is often in a different period from when the payment is made. This method of accounting provides a better picture of the company’s profits during an accounting period because the income statement will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues. This method also helps because it reports all the assets that were earned are reported and all the liabilities that were incurred are reported†. (Averkamp, 2004).