There are two accounting techniques that companies use to report revenues and expenditures. The 2 approaches are the accrual basis and cash basis. The difference in the accounting processes will fundamentally change the way the company reports its money, so a choice must be made prior to tape-recording any transactions.
Accrual Basis Accounting
Accrual basis accounting is the method accepted by business accounting and the general accepted accounting concepts. “Accrual-basis accounting implies that deals that change a business’s monetary declarations are recorded in the periods in which the event take place, even if the cash was not exchanged.
” (Kimmel, Weygandt, & & Kieso, 2009 )This accounting method follows both the profits acknowledgment concept, by reporting the profits when it is made and the matching concept by reporting the expenditure when it is sustained. “Recording profits prior to the money has been available in can possibly misrepresent a firm’s monetary results, permitting a business to show sales that might never in fact be paid for (state, due to the fact that of monetary issues with the buyer).
” (Money Basis Vs. Accrual Basis Accounting, 2002) Accountants pick the accrual method of accounting over the cash basis due to the fact that it more precisely represents the business’s finances.
Cash Basis Accounting
Money basis accounting is the other approach of reporting earnings and costs. When using cash basis accounting, “companies record revenue just when money is received. They tape expense only when money is paid.” (Kimmel, Weygandt, & & Kieso, 2009) This method does not follow the revenue recognition principle or the matching concept, therefore, is not an usually accepted accounting concept for big corporations.
“The IRS modified its position in 2000, permitting taxpayers who have gross receipts of $1 million or less to utilize the cash method (Rev. Proc. 2000-22).” (Gilmore & & Miller, 2003) This change enables small companies to use the cash basis technique, so they are only paying taxes on earnings received. The cash basis accounting method advantages small companies and people however is not an ideal choice for large corporations.
A company must decide what accounting process is more beneficial prior to recording any transactions as this affects the way they record the information. The accrual basis method records the revenue and expenses when they occur, and the cash basis method records revenue only when cash is received and expenses only when paid. The cash reporting method tends to misrepresent an organization’s financial performance by reporting expenses prior to receiving payment for the service. The accrual basis accounting method reports financial transactions more accurately and, therefore, is the most appropriate choice for large businesses.