Acc 211 M2D1
Name
Institutional Affiliation
Accrual Accounting
It is an accounting method that measures the performance of the company regardless of the period cash transaction will take place. Therefore cash transfer needs not to have happened for the revenue and income to be recorded (Toma,2015). It is the most standard accounting practice for most of the company unless it is a small company.
It is an expensive method to implement, but it is, but it provides the accurate, current state of a company. Accrual accounting is applicable in my current professional career when measuring the performance of the company. It is also applicable when I want to make a financial decision that requires me to have an accurate current state of the company. Lastly, I can also apply accrual accounting when I am needed to pitch for my long term finance.
An example is when a firm offers services worth $10000 to its clients on June 1st. The clients, however, receive the bill to pay for the services provided on June 30th. Since the money will be received on June 30th, the revenue generated will be recorded during this date. In case the firm also decides to sale some of its machine that is worth $ 10000, the amount will not get recorded until the payment is made. Therefore, since accounting in this method entails recording cash received or cash paid, it is easy to track the cash flow in the firm. It is
Cash Accounting
It is an accounting method that entails reporting revenue into the income statement only when cash gets received. The expenses of an organization are also recorded when the cash is paid out, and therefore it is an effective method in a small company (Goel,2016). The method is applicable in my professional career when I am running a small organization, and I need to be aware of the cash on hand. I can also apply this method when paying taxes since I will only pay tax on the money that I have received and not the invoices I have issued. The method is effective because it will help my organization in keeping track of the cash flow.
An example is when a company provides services to a client on June 1st, which is worth $ 10000. The client is then issued with a bill to pay for the services rendered on June 30th. For the company, the revenue will be recognized to have been received on 1St June even though the cash will not have been received. The amount in the recorded as the account receivable in the current asset section of the financial statement of the company.
When using these accounting methods in a professional career, cash accounting is beneficial when one needs to know the amount of money in hand. It is, however, not accurate because it can show a company as profitable because it has not yet paid some bill, and therefore it not very effective when making managerial decisions. On the other hand, Accrual accounting is much more accurate, especially for a big firm because all the bill that comes in are recognized as an expense even though the payment is not yet made. It is, however, not efficient because a firm may end up paying for tax on income even before a client has made the payment.
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References
Goel, D. (2016). The earnings management motivation: Accrual accounting vs. cash accounting. Australasian Accounting, Business and Finance Journal, 10(3), 48-66.
Toma, C., Carp, M., & Rob, I. B. (2015). Harnessing Financial Information in Investors Decisions: Accrual Accounting versus Cash Accounting. Procedia Economics and Finance, 26, 1044-1051.