October 8, 2012
When using accounting principles there are two different types that a company may use. The two are both important for the company to use but have their differences. The two types are accrual basis and cash basis. Some companies prefer accrual basis over cash basis due to the differences that they each have.
Accrual basis accounting reports income when earned and expenses when incurred. “By using accrual accounting the company has control when the income and expenses are recognized”(investor word.com). Most companies have to use accrual accounting because it is required by law. When using accrual accounting the company has a more accurate picture of their finances. The accrual accounting basis is great for bigger companies to use. It allows them regardless of when a transaction is made to record it as if it has already taken place. This can cause issues if cash is accounted for and never is paid. The company will have issues because the end month result will be incorrect. This is one of the reasons that accrual accounting is looked down on because that can cause issues for the company when that happens.
“Cash basis accounting reports the income when received and expenses when paid”(nolo.com). The cash basis only recognizes the money when it is physically in their possession. Small business usually use this type of method. By using the cash basis it makes it easier for smaller business to recognize when money has been made and when something has been paid out. This will eliminate any errors that could have been made if the information was recorded before it actually occurred. This is a great tool for smaller businesses and enables them to keep up with their finances.
Both accounting principles are important, and it is important that they are used correctly so that mistakes aren’t being made. The main difference between the two is the timing when things are recorded and this can have...