Cash vs Accrual: Is There a Difference in Recognizing Transactions?
ACC 205 Principles of Accounting I
December 12, 2011
Cash vs. Accrual: Is There a Difference in Recognizing Transactions?
There are two types of accounting methods that dictate how the companies’ transactions are recorded in the company’s financial books. The methods are cash accounting and accrual accounting. The difference between the two is now and when a company record income and expenses. It is actually up to the company to decide which method to use because there are pros and cons.
In cash accounting, companies only records cash receipts and cash payments from customers when goods are received or services are performed (“Cash vs. Accrual Accounting”). “It ignores receivables, payables, and depreciation,” (Horngren, 2012, pg. 131). For example, a company sells a product to a customer on December 10, 2011 and receives payment on December 15, 2011 and would record those cash earning on December 15, 2011. Cash earnings include checks, credit-card receipts, or any other form of revenue from customers (Wiley, 2011). The cash method has the tendency to distort income and expenses. It doesn’t account well for situations where credit is extended to customers, use credit to buy from suppliers, or keep inventory of the products sold (“Cash vs. Accrual Accounting”). It also leads the company to believe they are experiencing false highs and lows if they receive many payments one month (“Cash vs. Accrual Accounting for Small Business”).
In accrual accounting, company’s records revenue when the actual transaction is completed not when it receives the cash. In other words the company records revenue when it earns it, even if the customer hasn’t paid yet (Horngren, 2012, pg.131). In the example above, if using the accrual method, the company would record the sale as income on the day the product was sold, December 10, 2011, rather than December 15, 2011, when the company actually... [continues]
ACC 205 Principles of Accounting I
December 12, 2011
Cash vs. Accrual: Is There a Difference in Recognizing Transactions?
There are two types of accounting methods that dictate how the companies’ transactions are recorded in the company’s financial books. The methods are cash accounting and accrual accounting. The difference between the two is now and when a company record income and expenses. It is actually up to the company to decide which method to use because there are pros and cons.
In cash accounting, companies only records cash receipts and cash payments from customers when goods are received or services are performed (“Cash vs. Accrual Accounting”). “It ignores receivables, payables, and depreciation,” (Horngren, 2012, pg. 131). For example, a company sells a product to a customer on December 10, 2011 and receives payment on December 15, 2011 and would record those cash earning on December 15, 2011. Cash earnings include checks, credit-card receipts, or any other form of revenue from customers (Wiley, 2011). The cash method has the tendency to distort income and expenses. It doesn’t account well for situations where credit is extended to customers, use credit to buy from suppliers, or keep inventory of the products sold (“Cash vs. Accrual Accounting”). It also leads the company to believe they are experiencing false highs and lows if they receive many payments one month (“Cash vs. Accrual Accounting for Small Business”).
In accrual accounting, company’s records revenue when the actual transaction is completed not when it receives the cash. In other words the company records revenue when it earns it, even if the customer hasn’t paid yet (Horngren, 2012, pg.131). In the example above, if using the accrual method, the company would record the sale as income on the day the product was sold, December 10, 2011, rather than December 15, 2011, when the company actually... [continues]
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