Accrual and cash accounting basis are two methods applied in recording accounting transactions. The differences between the methods exist in the timing of transaction recordation. In cash accounting, recording of revenue only happens after receiving cash from customers, while the recording of expenses occurs after payment of cash to employees and suppliers (Helstrom, 2019). Accrual basis, on the other hand, recognizes expenses after billing and revenue after earning. In the accrual method, recording of revenue occurs immediately, whereas, in the cash basis method, recording of revenue occurs after receiving credit payment.
An example of cash and accrual basis accounting can be illustrated using a case where a website development company was hired by a client to build a website at the beginning of December. The two parties agreed on payment after service completion. The contract was to take several months, but the client loved the progress and paid services at the end of January. Under the cash basis accounting method, accounting of the service's payment would only happen for January, not under December. On the accrual basis, accounting for the received payment would only occur for December and nothing for January.
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Companies might need to adjust their general ledger with time. Journal entries are critical building blocks in creating an organization's income statement and balance sheet. Firms adjust their journal entries to comply with general accounting principles (Helstrom, 2019). Adjusting a general ledger is essential to adjust a firm's expenses and revenue accounts to ensure the inclusion of all business activities in the organization’s financial results, regardless of cash exchange or processing of transactions through accounts receivable and accounts payable.
Reference
Helstrom, K. (2019). Purpose of Adjusting Entries in a General Ledger. Retrieved from https://smallbusiness.chron.com/purpose-adjusting-entries-general-ledger-56929.html
