Study Document
Cash Basis Vs. Accrual Accounting Essay
Pages:3 (864 words)
Sources:2
Document Type:Essay
Document:#93022569
Accounting
Re: Accounting Policies
The company is facing a challenge where it does not have the cash needed to pay employee salaries. Although the company shows a profit, it has negative cash flow at present. Understanding how cash accounting and accrual accounting works will highlight how this situation has come to be. Cash accounting is accounting via cash flows which is a simple methodology, typically used by small business. It is relatively easy to implement, but has a disadvantage of distorting the actual profitability of the company when the timing of cash flows are not aligned with the timing of events, something that is the case with BizCon (Accounting Tools, 2017).
The 180 financing, for example, appears as revenue on the income statement (accrual) but the cash has not yet been received. The insurance that was purchased in advance is a cash flow, but the insurance is not reported in accrual accounting as having been purchased. The cash goes down but the balance sheet shows prepaid insurance as an asset as well, so there is a slight distortion there in that the value of assets doesn\'t change, when via cash basis it would have because of the decrease in cash.
The delayed wage payments are a current liability on the balance sheet in accrual accounting, and but would not show on the income statement yet. This transaction also wouldn\'t show on cash basis either, but the reality is that it should be recorded as an expense.
It is recommended that management looks at both cash flows and accrual accounting. There are advantages and disadvantages of both. Cash basis accounting is great for making sure that there are no cash flow problems, but it has the disadvantage of masking some of the items where the impact to the organization stretches over long periods of time, such as the 180 day credit or the 2 year insurance prepayment. In contrast, accrual accounting is accepted under GAAP, aligns items with the time period of the impact to the organization, even over multiple quarters and years. But accrual accounting has the disadvantage, especially for more vulnerable companies, of potentially portraying a significantly different picture than what the cash flows portray – management is surprised that there is a cash flow problem here, because accrual accounting does not show that on the income statement (Wilkinson, 2014).
As such, the situation that BizCon now faces is that it owes wages, but lacks the…
Sample Source(s) Used
References
Investopedia (2017). Cash basis vs. accrual basis accounting. Accounting Tools. Retrieved March 11, 2018 from https://www.accountingtools.com/articles/cash-basis-vs-accrual-basis-accounting.html
Wilkinson, J. (2014) Cash accounting vs accrual accounting. The Strategic CFO. Retrieved March11, 2018 from https://strategiccfo.com/cash-accounting-vs-accrual-accounting/
Related Documents
Study Document
Cash Basis Verses Accrual Basis
Cash Basis vs. Accrual Basis The cash basis of accounting is more likely to be used by service businesses than by retail or manufacturing businesses. Service businesses usually do not need equipment and can sell a service they perform with nothing more than their own hands and minds. Think of people who are lawyers, writers, public relations and advertising personnel, and accountants.. (Edmonds, McNair, Milam, and Olds, Fundamental Financial Accounting Concepts,
Study Document
Accounting in Just About Any Part of
Accounting In just about any part of the world, accrual accounting is preferred by government over cash accounting, for several good reasons. To understand these reasons, the first step is to understand what the difference is between accrual accounting and cash accounting. Cash accounting is a standard form of accounting for very small businesses and for households, where the entire basis of accounting is the cash flows in and out. Under
Study Document
Basis of Accounting
Accounting The accrual basis of accounting recognizes income when it is earned and expenditures when they are incurred. This basis is used for financial statements for a couple of reasons. The first is that it is transparent, and the second is that it is consistent. For publicly-traded companies in particular, accrual accounting allows stakeholders both internal and external to benefit from the consistent production and presentation of statements, and the
Study Document
Cash and Accrual Basis Accounting
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
Study Document
Accounting Concepts Revenue Recognition: Its Relevance and
Accounting Concepts Revenue Recognition: Its Relevance and Significance In the words of Kimmel, Weygandt and Kieso (2008), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Unlike is the case in the cash basis of accounting, revenue under the accrual accounting basis is recognized on the sale of a certain commodity or the performance of a given service. Under the cash basis
Study Document
Accounting Gapp, or "Generally Accepted Accounting Principles,"
Accounting GAPP, or "generally accepted accounting principles," has very specific meanings for the accounting profession. Like many other fields, these are best practice principles, and they both govern the standards of accountants and guide in licensing. They were designed so that there was a more even playing field, level of transparency, and trust in the accounting industry (see, for example, www.fasab.gov/accepted.html). While not always absolutes, these types of guidelines are a