Cash vs. accrual accounting, Financial Management

Cash vs. Accrual Accounting:

While it is beyond the scope of this module to assess accounting systems against all types of accounting styles, it is important that managers understand the differences between cash accounting and accrual accounting.

Accrual accounting can be characterised by:

  • Revenue / income being recorded when it is earned, not when it is received. In the real estate context it could be said that the sales commission is earned when the contract becomes fully enforceable, however the agency will not actually receive the commission until the settlement date.
  • Expenses are recorded when they are incurred, not necessarily when they are paid for. An example would be a building repair bill. The expense is incurred when the work takes place, however the bill may not need to be paid for 30 days.

Cash accounting on the other hand is characterised by:

  • Revenue only being recorded when it is received by the office (the cash is actually received)
  • Expenses are only recorded when they are paid for

Cash accounting is usually used in small business where expenses are generally paid at the time the particular service is actually provided.

The Australian Tax Office has recognised the advantages for small to medium size business in adopting the cash accounting formula. To this end, small to medium size business have the option of either method.

As there are significant differences in how the two accounting methods are used (and the tax position differs markedly), it is advisable that people considering whether to adopt a cash or accrual accounting method seek specialist advice relevant to their particular position.

For the purposes of this module, the cash accounting method is assumed where relevant.

Posted Date: 10/1/2012 4:31:53 AM | Location : United States







Related Discussions:- Cash vs. accrual accounting, Assignment Help, Ask Question on Cash vs. accrual accounting, Get Answer, Expert's Help, Cash vs. accrual accounting Discussions

Write discussion on Cash vs. accrual accounting
Your posts are moderated
Related Questions
North Star Company, a U.S. based MNC, is considering to establish a subsidiary to capitalize on the removal of Eastern European border restrictions. The subsidiary would manufactur

State the term- Financing Decision The second financial decision is financing decision,which essentially addresses two questions: a. How much capital must be raised to fu

Current Liabilities: A liability is an obligation to convey assets or do services at some future date. For purposes of balance sheet analysis, it is important to create a dist

Q. Explain Risk Adjusted Discount Rate Method? In the risk adjusted discount rate method the future cash flow from capital projects are discount at the hazard adjusted discount

Accounting Period - Accounting Principle Accounting period refers to span of time at the end of that and for which the financial statement are prepared to throw light on the r

Q. Define Policy formulation - accounts receivable management This is concerned with set up the framework within which management of accounts receivable in an individual compan

What is the meaning of Deviations Deviations must be recorded and investigated regardless of the amount involved and then assess whether deviations are isolated departures or i

Incremental Cost The measured change in a firm's cost of production due to an additional activity pursued by the firm. Incremental costs can be measured by the cost difference

Return Enhancement can be explained using following heads: Use of a Valuation Model: An investor having access to a bond valuation model can bu

Introduction When financial assets or bonds are pooled together and offered to the investors for receiving the inflow of funds from these underlying