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Accrual
versus Cash Basis Accounting
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Accrual Basis Accounting |
Cash Basis
Accounting |
Revenue is recorded when earned
and expenses are recorded when
incurred. They are recorded at
the end of an accounting period
even though cash has not been
received or paid.
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Revenue is recorded in the
accounting period in which cash
is received and expenses are
recorded in the accounting
period in which cash is paid.
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| The
following example illustrates
both methods of accounting for
the following items:
1/ The Helping
Hand Organization billed $10,000
to a customer in June for work
completed in June, however,
the amount would not be
collected until July. Under the
accrual method the entire
$10,000 will be recognized as
revenue in June as services were
performed in June. While under
the cash method no revenue would
be recorded in June and $10,000
will be recorded as revenue in
July when the cash is collected.
2/ The Helping Hand
Organization contracted for
some consulting services in
June. All services were
completed in June and an invoice
in the amount of $5,000 was
submitted to the organization on
the 25th of June. To reduce
administrative costs, the
organization has adopted a
policy of issuing checks on the
1st and the 15th of the month.
Therefore this invoice will be
paid in July. Under the accrual
method the consulting expenses
will be recorded in June, while
under the cash method the
expense will be recorded in
July. |
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The Helping Hand Organization
Statement of Financial
Activities for Month Ended June
30th, 200X |
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Accrual Basis Accounting |
Cash Basis Accounting |
| Contribution
revenue |
$100,000 |
$100,000 |
| Contract revenue |
10,000 |
0 |
| Total revenue |
110,000 |
100,000 |
| Payroll expenses |
90,000 |
90,000 |
| Consulting
expenses |
5,000 |
0 |
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| Excess of
revenue over expenses |
$ 15,000 |
$10,000 |
| As
you can see the financial
results are quite different in
each of the above two methods.
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Which method is the
best accounting method for my organization
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Cash Basis
Accounting |
Accrual Basis
Accounting |
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Easy to implement -
under this method the only time a
transaction is recorded when cash is
paid or received. A simple checkbook may
be all that is needed to keep the
records of the organization.
Many larger
organizations, including many with
bookkeeping staffs, also use the cash
basis of accounting primarily because of
its simpler nature. Often the difference
between financial results on a a cash
and on an accrual basis are not
material. |
In many instances, the
cash basis just does not present
accurately enough the financial picture
of the organization. The accrual basis
of accounting becomes the more
appropriate basis when the organization
has substantial unpaid bills or
uncollected income at the end of each
period and these amounts vary from
period to period. If the cash basis were
used, the organization would have great
difficult in knowing where it actually
stood. These unpaid bills or uncollected
income would materially distort the
financial statement.
Nonprofit
organizations are becoming more
conscious of the need to prepare and use
budgets as control techniques. It is
very difficult for an organization to
effectively use a budget without being
on an accrual basis. A cash-basis
organization has difficulty because
payment may lag for a long time after
incurring the obligation. For this
reason organizations that must carefully
budget their activities will find
accrual basis accounting essential.
Finally, for financial
reporting in accordance with generally
accepted accounting principles (GAAP),
the accrual basis of accounting must be
used. |
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