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aatiyakakar
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Posted: 04 Sep 2009 at 18:56 \| IP Logged

can any one explain this to me: kindly include figures as
well.

"Compared to the accrual basis of accounting, the cash
basis of accounting understates income by the net decrease
during the accounting period of..."

lacpawannabe
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Posted: 04 Sep 2009 at 20:46 \| IP Logged

I'll give it a try!

Cash Sales & nbsp; 100,000

Credit Sales & nbsp; 200,000

Expenses Paid &n bsp; 50,000

Accrued Expenses &nbs p; 50,000

Under Cash Basis your income = 100,000 Cash Sales - 50,000 Expenses Paid or $50,000

Under Accrual Basis your income = 100,000 Cash Sales + 200,000 Credit Sales - 50,000 Expenses Paid - 50,000 Accrued Expenses or 200,000.

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aatiyakakar
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Posted: 04 Sep 2009 at 21:02 \| IP Logged

what would be its effect on
Accounts Accrued
Receivable Expenses

Zeratul
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Posted: 05 Sep 2009 at 05:27 \| IP Logged

It seems like someone asks this question at least every two weeks! If you use the search function, you'll find the answer to your question.

Essentially you need to understand how changes in various balance sheet accounts reflect the differences between cash and accrual basis accounting.

Accrual:
Revenues are recognized when realized or realizable, earned, and collectibility is reasonably assured.
Expenses are recognized when incurred.

Cash:
Revenues are recognized when cash is received.
Expenses are recognized when cash is paid out.

Now let's think about accrued expenses. That's a liability account, created to meet the matching principle under accrual accounting. If it goes down, it usually means it was resolved through a payment of cash. The accrual means the expense was recognized in a prior period under the accrual method. So we have an expense under the cash basis which will be excluded from this period's accrual basis statements. The effect of this is that cash basis net income will be lower than accrual basis net income.

Now do a similar analysis for the receivable. If the receivable goes down, it normally means you received cash. You created the recievable in a prior period in order to recognize the related revenue under accrual. For cash basis purposes, you'll be recognizing revenues in this period which you will not be recognizing under accrual. Therefore net income under the cash basis will be higher than net income under accrual.

lovethepirk
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Posted: 13 Sep 2009 at 04:41 \| IP Logged

Zeratul,

Could you flip the scenarios at the bottom of your last post and assume Accrued expenses go up and AR goes up. I am going to take a stab and slap me around a bit please, cause this took a while for me to wrap my arms around...

For A/R going up I see this as accrued revenue matching for a future time meaning:

AR   xxxx
    Sales    xxxx

Meaning Accrual basis NI will be higher due to sales rising.

But for accrued expenses which I think means accounts payable...you have this entry:

Purchases    xxxx
      AP         &nbs p;    xxxx

I don't see how this would affect the Net Income between cash and accrual basis as no sales/revenue or expense account is modified?

Thanks,

ltp

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