Cash Accounting versus Accrual Accounting Assignment

Cash Accounting versus Accrual Accounting - Assignment Example But in accrual method, transaction is recorded as and when they happen rather than paid or received. So in accrual method the sale or receipt of goods and services are recorded as and when it happens .At times it is not easy to finalize when the sale or buying occurred ,then the contractor confirm the date when he received the goods and services and the transaction is recorded in the books. The cash and accrual method gives the same outcome as one can instantly see the results. The results of these accounting methods will only show variations, if the transaction is on a credit basis. In case the transaction of sales and purchases are done on cash and recorded immediately in the account then, which ever method one use the ledger will reflect the same results. The businesses with sales less than $ 5 million a year can choose whatever accounting method they want for their business. However in both the methods, the result will be only a partial picture of the financial stand of you busin ess concern. Chapter 2) Theoretical View a) Cash accounting method In cash accounting the primary importance is on the inflow and outflow of cash on everyday transaction of the business .As and when money moves in or out, recording is made in the ledger so that analysis can be made to the financial status of the business in a particular accounting period. According to Tatum (2003)â€Å"Part of the charm of a cash journal is that financial transactions entered as line items can be reviewed quickly when necessary, as well a providing a quick reference document when entering the transactions into other sections of the accounting books†. The author here emphasize that cash accounting is very reliable when it comes to the informative part of the business activities occurring on a daily basis. Cash is the blood life of a business concern, and cash accounting method allows the recording of the every movement of cash in the firm. The cash accounting method allows a small entrepreneur to understand the profitability of his firm without many complications. But this accounting method is useful mainly for small enterprises .The bigger firms use accrual accounting method where trillions of dollars are transacted at a time and sales and purchase of good and services are time consuming. The cash accounting system is quick and easy and help the owner of business on understanding cash reserves when dealing are mainly on cash basis. For example when one use a credit card to make a purchase, one does not have a reduction in the personal account until one pay for the credit card, this is considered cash accounting b)Accrual accounting If one consider accrual accounting , the revenues and expenses are recorded when they are incurred, regardless of money is moved in or out. As per Duchac (2006,pg.98) â€Å" Accrual accounting concepts are designed to reflect a company’s financial performance during a period and avoid misleading results that could arise from the timin g of cash receipts and