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Xacc 290 - Week Three Checkpoint: Accrual and Cash Accounting

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Week Three CheckPoint: Accrual and Cash Accounting

XACC/290

August 11, 2013

Week Three CheckPoint: Accrual and Cash Accounting

Accrual and cash-based accounting offer two different styles of tracking the flow of money in a business. Each serves a purpose and to understand this idea one must first realize the how one varies from the other. Accrual-based accounting can be described as any transaction that changes a company's financial statement is recorded in the accounting period the transaction was recorded. Such transactions are recorded even if the actual exchange of money did not occur at that particular time.

The accrual-based accounting system is designed to stay within the parameters of the expense recognition principal as well as the revenue recognition principal by recording revenues in the period they were earned earned and expenses at the time the revenue was reported.

Cash-based accounting is a system where the company records the transaction only when the cash is received. Expenses are also only recorded when the cash is actually paid. This type of accounting actually violates the revenue recognition principal and the expense recognition principal and is viewed as unacceptable or prohibited by generally accepted accounting principals.

An accountant for a business that experiences high levels of cash sales may use cash-based accounting. Using this style for a company of this nature may not be seen as a violation because the exchange of cash for services is being documented at the time of occurrence also reflecting the disbursement of expenses when they are paid. The financial statements show the flow of the money in and out of the business accurately and the high amount of cash transactions dictates that the company has a low or nonexistent level of customer accounts receivable, the cash-based method may be a better alternative.

References

Kimmel, P. D.,Weygandt, J. J., & Kieso, D. E. (2011). Financial accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley & Sons.

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