Organizations must select one or two possible accounting treatment techniques: cash-basis accounting and accrual accounting. Cash-basis accounting and accrual accounting depend on the period when sales and purchases are documented in the accounts. Cash accounting only deals on revenue and expenses when finances change hands. On the other hand, accrual accounting is used when revenue is earned and expenses when they have not been paid. Cash-basis accounting transactions that are recorded in cash basis systems comprise of physical exchange of coins and banknotes. They include written checks, credit cards, bank wire transfers, and bank debit cards. All these transactions can be quickly turned into cash (Warren et al., 2020). These transactions lack documentation receipts of promissory notes and the development of account receivables used for sending a client an invoice. As mentioned earlier, accrued accounting entails expenses that an organization plan to pay in the future. Examples of accrued-based transactions include bonuses, salaries or wages payable, utility costs that will not be billed until the next month, and costs related to future client warranty payments, returns, or repairs.
Both cash-basis accounting and accrued-basis accounting need to be handled differently due to varied reasons. For cash-basis accounting, all the transactions are recorded using a single-entry system. It only deals with cash inflows and cash outflows. Additionally, in cash-basis accounting, the transactions are recorded when the money has been paid out. The method is also easier to track the cash flows of the organization. In accrual accounting, the transactions are recorded in a double-entry system (Aswar & Saidin, 2018). It is also a technique that only deals with anticipated revenue and expenses. The technique also entails accounts receivable and payable, enabling the company to forecast its general image of long-term profitability. For small organizations, it is complex to implement accrued-basis accounting since there is a need to account for transactions such as revenue and prepaid costs that have not yet been earned.
Delegate your assignment to our experts and they will do the rest.
References
Aswar, K., & Saldin, S. Z. (2018). THE INFLUENCING FACTORS ON THE LEVEL OF ACCRUAL ACCOUNTING ADOPTION: A CONCEPTUAL APPROACH. Romanian Economic and Business Review , 13 (2), 22-28. https://www.rebe.rau.ro/RePEc/rau/journl/SU18/REBE-SU18-A4.pdf
Warren, C. S., Jonick, C., & Schneider, J. (2020). Accounting . Cengage Learning.
