subject: Accrual Accounting Background Problem and a Solution [print this page] This composition is going to have the comprehension that you have a basic knowledge of accounting basics. Just in case you do not then I will attempt to fill you in at once with a very inelaborate lesson about different basis of accounting. Probably the most natural basis of keeping books and records is the cash basis. Using this method, aught is recorded unless it has an effect on cash. It isvery much alike to an analyzed check register. The rationalization the cash basis is not used by many is that it missestransactions that have not yet affected cash but can have a very considerable effect on the entity.
So when you want to include even items that have not yet changed the cash balance you go into the domain of accrual accounting. Accrual basis accounting will keep accounts and transactions for items such as sales that have not yet been paid for or expenses incurred but not due to be paid. This is done by having such accounts as accounts receivable to record sales not yet paid for and accounts payable for expenses incurred but not due. These accounts just mention in a sense replace the cash account in these instances.
So now that you understand the difference between the two methods you will be also able to understand why the cash basis, though it is simple, can be missing some crucial information. So what can you do if you do not want to keep such detailed accrual basis records. it could be tedious booking every single sale before it happens and then reversing the entry when payment comes in.
The easy way to resolve this is to make a cash to accrual adjustment at the end of the year or period when you want to issue financial statements. This way books are kept on the cash basis but the records can be presented as accrual.
For more information on how to make this adjustment please visit my website.
Accrual Accounting Background Problem and a Solution
