February 14, 2013
Accounting systems vary from company to company. However, most companies depend on Generally Accepted Accounting Principles (GAAP). These principles keep every company using a standardized system of accounting. Therefore, if a financial institution or investor desires to see specific information about a company the financial officer will be able to read those books clearly. Cash based accounting is a type of bookkeeping. However, most organizations use accrual basis accounting. Both account for cash flow in and out of the organization. But only one accounts for overlaps of accounts from month to month. Cash basis accounting is used when an organization records all monies when the money is received. This also means that the organization accounts for all monies spent at the time that it was spent. This does account for cash flow but does not allow for monies earned and not yet received. Cash basis accounting also lacks an accrual system of money earned that was not received. For instance, if an organization performed a service in January and invoiced for that service in January. The accounts will not show cash flow until the payment is received in February. In the same instance, if an organization incurs debt in January and receives a bill but does not pay the debt until February, then the accounts will not show loss until February. This accounting system is flawed because it does not demonstrate proper cash flow at the time cash is earned or used. Accrual basis accounting accounts for activity at the time the activity occurred. When an organization incurs expenses from salaries for a few days in a workweek at the end of the month, those days’ salaries are accounted for through salaries payable even before the salary is paid at the end of the week. This offers a clearer view of an organization at the end...
References: Kimmel, P.D., Weygandt, J.J., & Kieso, D.E. (2010). Financial accounting: Tools for business decision making (5th ed). Hoboken, NJ: John Wiley & Sons.
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