Commercial Accounting
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Summary Question One
Commercial accounting and generally accepted accounting principles, generally prescribe the accrual basis of accounting over the cash basis. The methods to input accounting transactions are accrual basis and cash basis accounting. Both methods a
Accrual basis accounting is income that is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not (“Accrual Basis Accounting “, 2013). In accrual accounting revenues and expense are both recorded when they occur. Meaning that the revenue is recorded when earned than when cash is received, expenses are recorded when they occur instead of when payment is done. Since revenue is recorded before it is received the transaction is recorded as an account receivable. When cash is received before revenue is done the transaction is an unearned revenue. But when the revenue is done but no cash is received the transaction is recognized as account payable. Accrual basis considered its goods and materials as current assets. This method allows businesses to get an accurate amount of its profits and cash. Since this accounting methods uses the recognition and matching principles its accurate when it comes to profits.
Cash basis accounting consist of the record of money transactions at its current time. Cash basis recognizes income and expenses according to the money that has been received at that time. Income is recorded once funds are received instead of when they are earned. Expenses are recorded once they are paid instead of when it occurs. Cash-basis accounting does not recognize promises to pay or expectations to receive money or service in the future, such as payables, receivables, and prepaid expenses (Wikimedia Foundation, Inc.). Cash basis accounting provides accurate representation of current cash flow. This method of accounting does not involve revenue recognition principle and matching principle. Cash basis accounting is not an accurate when it comes to profits because it does not include account receivables and payables. Account basis could be confusing since it may appear that there is a profit when actually there is money being lost. Profit and loss in cash basis accounting is hard to determine since money owed is not recorded.
Accrual basis and cash basis accounting may have it similarities but in fact are very different. Cash basis accounting is a simpler method than accrual basis. Cash basis provides an accurate current cash flow, and accrual provides an amount that included money that has not been received. Cash basis only recognizes money that has been received in the other hand accrual basis recognizes income and expense before received or paid. Cash basis is accurate when it comes to the business cash flow but when it comes to money being lost or profit it is hard to distinguish how the business