Accrual and Cash Basis Accounting

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Accrual and Cash Basis Accounting
XACC/290
February 8, 2015

Accrual and Cash Basis Accounting

Accrual accounting is when a company accounts for their transactions as the event occurs, not necessarily when the actual cash transaction takes place. When the revenue is earned can be a different time than when the revenue is paid for; for example, when Company A is called in to fix an intercom for a tenant of one of Company B’s buildings. The revenue is earned on January 30 and will be on January’s transactions; however, Company B does not pay Company A until they are billed in February, when the revenue is recognized (Kimmel, Weygandt, & Kieso, 2009). On the other hand, cash accounting takes into account when the actual cash transaction takes place, when cash is exchanged for a transaction, the revenue is then recorded as earned. It is acceptable for an accountant to use cash basis accounting and not violate the generally accepted accounting (GAAP) for companies that are in the service industry. A nanny that works for a family may work from January 26th to February 9th and bills the family for that two week time period on February 9th. The family would pay in February and the revenue would be recognized as being earned in February (Kimmel, Weygandt, & Kieso, 2009). All in all, accrual accounting requires more work, but is generally accepted account principles and the more accurate of the two different accounting practices.

Reference
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Financial accounting: Tools for business decision making (6th ed.). Hoboken, NJ: John Wiley &…...

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