Discussion Question/Financial mgmt

Financial Management

Difference between Cash method of accounting and accrual method of accounting

Parameter Cash method Accrual method

Income / Sales Sales are recorded when you receive the money Sales are recorded when they occur , no matter when you are paid

Expenses Expenses are recorded when you pay the bills Expenses are recorded when the goods are received , even if one may not pay the bills

Complexity Low , so small companies follow this method High , so multi-million dollar companies use this method

Tax Tax burdens can be avoided as cash is

received after some time They can 't be avoided and have to included in the current year only Importance of accrual method of accounting

Accrual method matches income with expenses regardless of when they are paid and thus gives a better indicator of the account . Using cash method it might happen that in one month one pays lots of bills and no income while in the other one receives lots of cash resulting in skew ness

Moreover under the IFRS (International Financial Reporting standards norm accrual accounting is the only method and cash accounting is considered to be an unfair practice . Also it allows better planning of resource purchase as one has the surety of the amount of money in his account rather than projecting future earnings . It allows an owner to assess whether or not the business is generating profit . It also enables more focus on outputs rather than input

Thus , the accrual method is provides better financial management and better understanding of management performance

References

Accrual based accounting

http /www .moneyinstructor .com /doc /accrualbased .asp

Cash Vs Accrual accounting methods http /www .allbusiness .com /accounting-reporting /methods-standards-cash /1 308-1 .html

Accrual Vs cash based accounting

http /www .geocities .com /royston76 /method /m1 .htm

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