Cash Basis Accounting vs Accrual Accounting
There are several differences between cash basis accounting and accrual accounting. Cash basis accounting as defined by Warren is “to record transactions only when cash is received or paid” immediately (2013, p. 102). Accrual basis accounting is defined as “record[ing] revenue as it is earned and matches expenses against the revenue they generate” (Warren, 2013, p. 82). Both methods are used by small business and large companies depending on what is chosen and the amount of business is generated. The basic difference between cash versus accrual accounting is related to timing of when revenue and expenses are recorded.
Cash basis accounting recognized revenue when cash comes in and recognizes when cash is paid out. It is a much simpler and flexible method. In addition, cash basis accounting takes cash flow more into consideration and have no control over accounts receivables and account payables. “Cash-based accounting omits fixed assets, debtors, creditors and other liabilities” (Cordery, 2010, p. 58). A good example of a business that uses cash basis accounting are bars and restaurants. Bars and restaurants typically are all cash businesses. Since most bars and restaurants require their customers to pay for their spirits, food and, services immediately upon receipt, the cash basis is an ideal method for them to use. It allows the business to record their generated income when cash is received for services rendered or pay for expenses when they receive a product unlike accrual basis accounting.
Accrual basis accounting recognizes revenue when it is earned even when the customer has not paid and expenses are recognized when it occurs not when it is paid out. Accrual basis accounting is more complex and is accepted by generally accepted accounting principles (GAAP). It gives a better idea of real income and expenses over a period of time and gives a long-term picture. Examples required by law to use accrual basis accounting are larger businesses such as Sony, AT&T and, Hewlett-Packard. These organizations allow customers to purchase items and pay for them at a later date therefore, they incur accounts receivables. The accrual method is mandatory if the business has sales that amount to more than $5 million or if the business has inventory and sales totaling more than $1 million on an annual basis.
References
Cordery, C. (2010). Cash-based vs accrual accounting. Applied Technologies &
Innovations, 58-59.
https://search.ebscohost.com.ezproxy1.apus.edu/login.aspx?direct=true&db=aci&AN=55981101&site=ehost-live
Warren, C. (2013). Survey of Accounting, 6th Edition. South-Western Cengage
Learning.
https://ebooks.apus.edu.ezproxy1.apus.edu/ACCT300/Warren_2013_Ch03A.pdf