Explanation of Accrual & Cash Accounting

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ESP Educational Class
Mrs.ET Sopheak
Tel: 012289363 /0976469625

Accrual Accounting vs . Cash Accounting

An important consideration in measuring and recording revenues and expenses, as well as assets and liabilities, is when to record a transaction. Transactions need not involve cash. In those circumstances, the accounting question is when to record the event in the books of the organization (and thereby in the financial reports).

•Accrual accounting basic: Accrual accounting records transactions when they occur, regardless of when money actually changes hands between the organization and third parties. Examples are fee-for- service delivered and invoiced but payment has not yet been received by the organization (this would be included in revenues and accounts receivable) or a purchase of office supplies using a credit card where payment has not yet been made (this would appear as an expenditure and account payable).
•Cash accounting basic: Cash accounting records transactions only when there is an exchange of cash. Under this system, the sample transactions above would not be recorded until the fee-for-service was received (an increase in revenues) and until the organization paid its credit card bill (an increase in expenditures).

Accrual accounting provides a more accurate record of financial activities because it records the economic substance of transactions, whether or not cash has been received or paid. Under GAAP(Generally Accepted Accounting Principles), CICA (Canadian Institute Of Chartered Accountants) recommends that organizations use the accrual method.

Thanks,

Mrs.ET Sopheak

Lecturer in Economics