Checkpoint: Accrual Method
•Nonprofit organizations are required to produce financial statements based on the accrual method of accounting. How is this different from the cash basis of accounting? Why is accrual accounting important?
Cash basis accounting, for example when you ship goods out of your business to customers and they have receipt but have not received the cash, means that you may have not booked the revenue. Accrual accounting is more accurate with the timing of reported revenue and expenses. However in accrual providing satisfying the revenue recognition principles, you may book the revenue.
•In an accrual system, does revenue equal cash?
Revenue does not equal cash, reason being that the cash account movements depend on the receipt of the revenue. For example: deposits or payments from clients, and written checks.
•What is the importance of the statement of cash flow in the financial management of an organization? The statement of cash flow is of fundamental importance to an organization's financial management. This statement gives the organization a breakdown of every transaction that comes in or out. This is added up over a particular time period. If there is any difference in the organizational transactions, the statement of cash flow will show. The financial stability of an organization depends on how much money they are spending on an everyday basis. There is a chance that the organization can go bankrupt if they do not keep track on how their money is spent. These accounting practices offer solid documentation of where money goes.
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