The cash-basis and accrual-basis accounting are the approaches that a bookkeeper will use to record the business financial transactions. With the cash-basis accounting, the business’s revenue will only be recorded when there is cash exchanged. In other words, when the revenue is received as cash or when the expenses of the business are paid. The accrual-basis accounting will record the revenue immediately after the legal obligation has been created. This is when the goods have been shipped or when the services have been completed. Therefore, it does not matter if the cash has actually been exchanged or not. The expenses will be recorded when the company is obliged to pay their bill.
There are a couple of key differences between the two approaches. The first difference is that the accrual-basis accounting applies to the concept of the matching principle when the cash-basis accounting does not apply to the concept. Using the concept of the matching principle will require the bookkeepers to record in the same period of time that the revenue and the expenses are recorded. The matching principle will help to make sure that the company is going to make profits because they will be accurately reported. The second difference is when the revenue and the expenses will actually be recorded in the accounts of the business. Based on when the revenue is recorded will determine the amount of profits that a company makes (Elliott, 2013).
As a business owner, I would prefer to use the cash-basis accounting. This is because I could manipulate my financial statements so that I will have a higher net incomes for a certain period of time. This means that I could defer a payment of some of my expenses to a different period. These expenses might include salaries, rent, and utilities because these are things that might not always need to be paid at the same time. But it is very important to remember that based on accounting standards, the cash-basis accounting methods will not be allowed. The accrual-basis accounting will allow a company to match the revenue and expenses effectively.
References:
Elliott, Barry and Elliott, Jamie. (2013). Financial Accounting and Reporting. Pearson
Education: Upper Saddle River, New Jersey.
