Differentiating Between Cash and Accrual Basis Accounting

Differentiating Between Cash and Accrual Basis Accounting

Accounting is often referred to as the language of business. Overall, the general populace fails to realize all the different aspects of running a business, especially today. So many things are pivotal in determining the success or failure of that company or organization, one of which is the most vital is accounting. Thus far, with the knowledge and skills acquired thus far, the differences between cash-basis and accrual-basis accounting are as follows.

The cash method’s essential advantage is its simplicity; this can be a viable option for a business or organization in the beginning stages of inception or operation due to the ease or simplicity factor. Revenue is reported on the income statement only when cash is received. Expenses are only recorded when money is paid out; this allows for cash flow to be tracked easily and more precisely with both incoming and outgoing of the company or organization. Meanwhile, on the other hand, this method can overstate or understate the health of a company depending on current cash flow. For instance, if a company or organization is cash-rich but also shows a large sum of accounts payables, this scenario may prove challenging to get an actual or accurate evaluation. This may give a potential investor or business owner the illusion that the company is making money or profitable when it is the exact opposite.

However, on the other hand, the critical advantage relates to the accrual basis accounting method because it is not solely dependent on cash alone. This method is more heavily involved and independent of Accounts Payableandvable, which in turn allows for a more accurate picture of the profitability or lack thereof, particularly long-term. Ther basiThis method has several disadvantages and can be more challenging and complex to implement. This may require a full-time accountant or CPA as the business expands and grows. One of the significant disadvantages of the accrual method is its inability to track cash flow; as a result, it might not account for a company with a substantial cash shortage in the short term, despite looking profitable for a long time. In conclusion, with the knowledge and skills acquired thus far, the differences between cash basis and accrual basis accounting. I would personally recommend the cash method for a company that is in the beginning stages of inception or operation, intending to transition into the accrual method as the business begins to mature and grow.

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Differentiating Between Cash and Accrual Basis Accounting

If you were to open a small business with the knowledge and skills you have acquired, would you prefer to keep your accounting records on a cash or an accrual basis? Reflect on the differences between cash-and accrual-basis accounting, and explain why you selected one option.

Your journal entry must be at least 200 words in length. No references or citations are necessary.