Before any business transaction, one must decide whether to use Accrual Accounting Or Cash Accounting Method. The two methods are different based on timing of when the purchases and sales are recorded and recognized. In cash- based accounting, revenue is only recognized when the money is received, and expenses are accounted for when the money is paid out. Cash basis of accounting is used in small businesses. On the other hand, accrual based accounting, revenue is recognized when it is earned and not when it is received unlike the cash basis of accounting. Expenses on accrual basis are recognized when the goods and services are received, and it is used in big business and many business firms (Clarke, 2012).
Another difference comes in on how cash is tracked between the two methods. In accrual basis, it does poor job of tracking cash despite the fact that, it does a recommendable job in matching the revenues and expenditures. As a result, it recognizes income before it is received and expenses before they are paid. However, cash basis of accounting is contrary to the accrual basis, in that, it does an excellent job of tracking cash flow. Accounting basis does a poor job of matching the revenues and expenditures unlike accrual basis of accounting (Needles, 2013).
The Financial Accounting Standards Board (FASB), which outlines the accounting principles, discourages businesses from using cash -basis method. This is because; expenses and revenues are not correctly matched (Needles, 2013). However, cash accounting provides small businesses with simple tactics of managing financial information. For this reason, an accountant may use cash accounting for personal finances since it is simple and cheap to maintain. By so doing, the accountant will have obeyed the materiality principle of the GAAP. Cash accounting is acceptable for small businesses since it is easy to determine when the transaction has occurred.
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"Accrual Accounting And Cash Accounting Method".
- Clarke, E.A., (2012). Accounting: An Introduction to Principles and Practice. Boston: Cengage Learning.
- Needles, B., (2013). Practical Accounting. London: Chapman Publisher.
