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Accrual Based Versus Cash Based Accounting System
Wilbert Thacker
Financial Accounting/ ACC 537
March 3, 2014
Edward David

Accrual Based Versus Cash Based Accounting System
In accounting there are different systems or approaches that can be used when reporting data.   One system is the accrual based accounting system.   Another system is the cash based accounting system.   These systems are used to report data that includes profit margin in comparison to expenses.  
Accrual based accounting means transactions that changes a company’s financial statements are recorded in the periods in which they occur (Kimmel, Weygandt & Kieso, 2007).   This means companies recognize revenue when earned versus when they actually receive the payment.   This is a more accurate way of recording data especially when trying to determine expenses in comparison to revenue generated.   For example if a company was selling sneakers they purchased ten pair of sneakers at $150.00 each and sell them for $200.00 each, their expense would be $1500.00.   Being that they are sold at $200.00 each the revenue would be $2000.00 thus producing a net income of $500.00.   Now even though the sneakers were purchased in 2013 full payment wasn’t received until 2014, but in an accrual based system the income would be reported as received in 2013.  
Cash based accounting system is when companies on report expenses when cash is paid and only report revenue when cash is received.   In basic accounting principles this method is prohibited because it does not provide accuracy for a company’s expense report and profit margin.   In the same example used above with the sneakers in cash based accounting system the company would report $1500.00 for expenses in 2013 and $2000.00 as net income in 2014.   This is not very accurate because the financial statements would be off for 2013 to 2014.   Basically it would show the company took a $1500.00 loss in 2013 but then made a $2000.00 profit which would clearly be from one...

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