Essay on Accrual Accounting vs. Cash Accounting - 1148 Words

The recording of financial activities in a business is essential in making sure accurate information is provided for decision making. Zafirakis (2005:4) states that Accrual accounting is the cornerstone of modern accounting procedures. In this essay, the importance of accrual accounting will be considered by looking at how it functions in the Double Entry System and comparing it to cash accounting, another method of gathering financial information. Time and an accurate accounting measurement is what will be considered in determining the importance of accrual accounting. Double-entry accounting is used to develop accounting data. From this data, we can determine the performance of a business by calculating its profit, revenues -†¦show more content†¦Generally debits and credits equal to one another, ensuring the balance of the accounting equation. Accrual Accounting attempts to recognize events either before or after those events have been settled in cash (Zafirakis 2005:33). Because we do not consider when the cash transaction has happened, there are four scenarios that require us to adjust entries made in the double-entry system after a financial period of time has passed. This ensures an accurate account of a business revenue and expense events. To illustrate this, the four scenarios of when adjustments need to be made will be expanded. We will examine how expenses are recorded in the accrual basis of accounting. One scenario is that of a Prepaid Expense. When we pay for an expense before hand, it becomes an asset. We debit the prepaid expense account and credit the cash account. After a certain amount of time has passed, the expense happens, we adjust the entry by debiting the expense account and crediting prepaid expense account. Another scenario of an expense is when it has happened but a business has not yet paid. This is an Accrued Expense. We debit the expense account and credit the accrued expense account (which is a liability). An example of this is when employees have done their job but the company has yet to pay them. Wages expense is debited and wages payable is credited. Wages payable is an example of an accrued expense. Recording revenues in an accrualShow MoreRelatedBusiness Accounting Methods : Cash Vs. Accrual Essay1420 Words   |  6 PagesUsing the wrong accounting method There are two main business accounting methods: cash vs accrual. Cash accounting is the much simpler method and the method that most small start-up businesses will use because it is based on the actual flow of your cash in and out of the business. Cash basis accounting does a good job of tracking cash flow, but it does a poor job of matching revenues earned with money laid out for expenses. 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