Basic Accounting Concepts and Business Structures

The accrual basis of accounting uses the adjusting process to recognize revenues when earned and expenses when incurred. The cash basis of accounting recognizes revenues when cash is received and records expenses when cash is paid. An example of accrual basis of accounting is if a company is insuring a building. The insurance company bills the company $600 every six months. If each bill is for six months of coverage, then under the accrual method, the company would not record a $600 expense in January and a $600 expense in July. It would instead record a $100 expense each month for the whole year.

The cash basis of accounting records revenues when cash is received and expenses when cash is paid out. The accrual basis of accounting records revenues when they are earned and expenses when resources are used.

In accrual accounting, an expense is recognized when the business is obligated to pay it. As goods or services are invoiced, the invoices are posted and counted as assets. Expenses are also posted at the time they are incurred. Accrual accounting is used at most mid-level and large businesses and provides a more accurate picture of the company’s current condition, it is however more expensive to implement. This type of accounting is required by GAAP. Although this type of accounting is more complex, it allows one to track receivables and payables, and match revenues to expenses, which gives more meaning to financial reports.

4. The cash basis of accounting is commonly used by small businesses that are not publicly traded.

The difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method for revenue is only used when the money is received and expenses are only used when the money is paid out. The accrual method is used for revenue when it is earned and

Accrual basis accounting is the measurement of resources provided by revenues and the measure of expenses. The difference of these two measurements is net income or net loss if expenses are greater than revenues related to providing goods and services to customers. (Spiceland, Intermediate Accounting, 2011, pp. 6-7)

GAAP stands for Generally Accepted Accounting Principles. This is a key component to know in any business. GAAP is based on established concepts, objectives, standards and conventions to guide how financial statements are prepared and presented. GAAP’s objective is to provide information that is useful to investors, lenders, or others that provide resources to a company or not-for-profit organization. GAAP includes principles on a few things. One is recognition. Recognition is defined as what items are to be listed on the financial statements. This includes assets, liabilities, revenues and expenses. The next is measurement. This refers to the amounts that need to be reports of each part of the financial statement. Another is presentation. This refers to what is displayed and listed on the statement and how they are organized. And lastly there is disclosure. This includes the specific information that is the most important to the people that utilize the financial

Under GAAP, it is possible to use cash-basis or accrual basis accounting for revenue recognition. Under cash basis, revenue is recognized with payment is received. Under accrual basis, revenue is recognized when it becomes economically significant. GAAP has specific requirements for various industries on when an event qualifies to be recognized as revenue.

Each user of the financial statements interprets the information in a different manor. They use the information to determine their interactions with the organization. Management, investors, and employees use the same information from the financial statements but for different purposes. These four basic statements are the fundamentals of accounting which can be much more detail and complex. They do not need to be more complex for the users of the information; these basic statements have all the information needed to make

Consistency. When the company chooses the accounting method, it should continue using it throughout. It should be the same from period to period and year to year. If the company chooses to change the method, it should be disclosed and explained why the company made such a change. This concept can also be described as logical coherence among parts or things, when the same sequence is followed from one period to another.

The major distinction between the accrual and the cash basis of accounting is when revenue and expenses are recognized. When the cash method is used, revenue is recorded when money is received. Expenses are recorded only when money is paid. The Accrual method accounts for revenue when it is earned. Expenses for goods and services are recorded when they are incurred. The

GAAP is exceptionally useful because it attempts to regulate and normalize accounting definitions, assumptions, and methods. Because of generally accepted accounting principles one is able to presuppose that there is uniformity from year to year in the methods that are used to prepare a

The structure is based upon generally accepted accounting principles (i.e. GAAP). It is focused on utilizing a double entry system to understand what is happening and serve as a way of rechecking the information. The sources of it include: the total debt, liabilities, revenues and credits. This helps actuaries to determine where possible errors occurred and how to correct them.

I believe that each of these could be good for your business just depending on the business. Like to use the cash-basis you would need a business that does not have a lot of receivables and payables. If you have more receivables and payables I would suggest that you pay a little more money for the accrual basis you’re more likely to have a bigger business anyways.

Accrual accounting is an accounting method that is utilized to size the performance and of a company by recognizing circumstances regardless of when cash transactions occur. They are documented by matching revenues to expenses at the time in which the transaction occurs rather than when a payment is processed. This method allows the current cash credits and debits to be combined with future expected cash flows to give a more accurate picture of a company 's current financial state. It is ideal to use this method of accounting if an organization has a revenue of more than five million per year. While the accrual method shows the flow of business income and debts more accurately, the downside to this method of accounting is that financial advisers may be blindsided as to what cash reserves are available, which could ultimately result in some serious cash flow obstacles. A common example that I have seen used which helps me understand is when your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven 't paid you yet. Cash Basis accounting is when revenues are documented when cash is received and expenses are recognized when paid. The cash basis of accounting is usually utilized by small companies with a revenue of less than one million annually. The cash method provides a more accurate picture of how much actual cash your business has. Cash basis accounting is allowed for tax purposes only for smaller