Running Head: The Difference between Cash and Accrual Accounting Methods
The Difference between Cash and Accrual Accounting Methods
University of Phoenix
ACC/362 Financial Accounting 1
Paul Dommes
May 26, 2008
Week 3
The Difference between Cash and Accrual Accounting Methods
Introduction
This paper will explain the difference between the cash method and the accrual method of accounting. This paper will be explaining which type of accounting method those large companies and which one small businesses uses. Will explain what determines the cash method from the accrual method.
Cash Method
The cash method is an alternative method that small business can use to perform the bookkeeping for their firm. Under the cash basis the revenue is recorded when cash is received, and the expense is recorded when cash is paid. Sometimes while using the cash method leads to misleading financial statements. The cash basis is justified for small business because they have few receivable and payables. The cash method accounting is not in accordance with the generally accepted accounting principles (Weygandt 2006 p.7).
Cash basis accounting records financial events based on cash flows and the cash position. With cash method accounting the revenues and expenses are characterized as cash receipts and cash payments. In the cash method accounting two types are used today which are strict and modified. The strict cash method details the cash flow exactly. Modified cash method includes some elements from accrual basis accounting such as inventory and the property capitalization.
Issues with Cash Basis
“The cash method accounting is not acceptable for entities which make ...