In this paper I have defined accrual and cash basis accounting. Also, I have answered the following questions: Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting? What are the purpose of a journal and a ledger? Give an example of a contra-asset, and explain how it is recorded on the ledger as a transaction. Explain what a “prepaid expense” is and how it is recorded on the ledger as a transaction. What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any? List and record each transaction
Gold Corporation, a personal service corporation (PSC), had gross receipts of $4 million in 2009, $7 million in 2010, and $5 million in 2011. Which of the corporations will be allowed to use the cash method of accounting in 2012?
This revenue procedure applies to a qualifying small business taxpayer as defined in section 5.01 with average gross receipts of $10,000,000 or less that is not
Accrual method corporation. A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the 15th day of the 3rd month after the close of that tax year. Make the choice by reporting the contribution on the corporation's return for the tax year. A declaration stating that the board of directors adopted the resolution during the tax year must accompany the return. The declaration must include the date the resolution was adopted.
Information based on accrual accounting has historically and empirically provided a better indication of a company’s ability to generate cash flows than information gathered under the cash method. If there is not inter-period allocation, then the information is not as meaningful and will result in a mismatching of economic benefits
Based on the decision of accrual vs. cash basis, describe when revenue would be recognized on the sale of inventory, and how the accrual reporting differs from cash basis.
deductions allowed by Chapter 1 of the Code which are directly connected with the production of gross income,
There are two kinds of accounting basis which can be adopted by the company to prepare its financial position. One is accrual basis of accounting where revenue and expenses are recognized when they are received and incurred and other is cash basis where all the revenue and expenses are recognized when cash is received or paid (Cleverley, Cleverley, & Song, 2012). Generally, small businesses, not-for-profit organizations, some Government agencies and community associations use the cash-basis while larger for-profit businesses use the accrual-basis (Baskerville, 2014). This is because the cash-basis is quite simple to understand and maintain while the more complicated accrual-basis produces the more accurate assessment of the financial position and performance of the business. Tax laws and accounting standards generally give small organizations a choice as to which approach they will adopt. At the same time larger organizations and public companies are required to record their financial transactions using ONLY the accrual method.
Most small businesses are free to choose either cash basis or accrual basis. (Fishman 2007) The cash basis accounting will be the best choice because it can save lots of expense in record-keeping. If you have a big company with lots of sales on credit. You need to use accrual basis accounting. (Fishman 2007) Big companies always have lots of sales on credit and purchase on credit, so the cash basis will have lots of delay caused by the time. In addition, big companies always have expense machines. If you use cash basis, the expense of the machine will be record to only this financial year. However, if you use accrual basis accounting, the expenses will be record into many years and it is called depreciation. The record is more accurate. The revenue record principle requires that revenue need to be record when earned, not when the cash is received and this principal is very important for all companies.
The major distinction between the accrual and the cash basis of accounting is when revenue and expenses are recognized. When the cash method is used, revenue is recorded when money is received. Expenses are recorded only when money is paid. The Accrual method accounts for revenue when it is earned. Expenses for goods and services are recorded when they are incurred. The
There has been a significant debate focusing on costs and benefits of adopting accrual basis of accounting over cash basis of accounting. This paper illustrates the concepts of accrual basis of accounting, highlights the benefits of accrual basis of accounting posed by its advocates and also briefly discusses the disadvantages of adopting accrual basis accounting. The paper also briefly discusses the recent accounting scandal of Tesco Plc. which showed that profits of the company were overestimated by approximately 250 million and resulted in suspension of eight employees as well as an initiation of investigation by Serious Fraud Office (SFO) UK. The paper finally concludes that the substantial risks and costs associated with accrual basis are yet to be justified to encourage its adoption.
Accrual-basis accounting is when the transactions are recorded in the periods in which the event occurs (Kimmel, 2007). The company records the transaction on items when they are earned rather than when they are received. Cash-basis accounting is just the opposite and the company records revenue only when the cash is received. The cash basis method is not allowed under the generally accepted accounting principles because it is important that all companies are on the same system.
Accounting principle and theory are generally referred to two main accounting methods which include cash accounting and accrual accounting. Cash basis accounting on income and cost is determined by the amount of actual payment for reference and accounting recording mode is simple, easy to master. The use of the accrual basis of accounting is more complicated than it with a main difference of recording timing. This essay will firstly separately discuss related conception and theory of cash and accrual accounting. Following this, it will explain the advantages and disadvantages of those two dealing method. Finally, it will offer two examples to describe
I would explain these methods (accrual balance and cash flow statement), to Irene in this way:
2.1 Why the income statement is prepared using the accrual basis of accounting and how it differs from cash accounting