Accruals are adjustments in regards to revenues and expenses when they are earned or an occurrence have not been recorded within the account. Accrual accounting are recorded at the time the revenue or expense hit even though cash was not paid at the moment the revenue or expense is recorded. Businesses recognize a liability and matching expense for utility costs as of the end of the month, even though the bill hasn't been received. This allows the company to match the business expenses with the revenues that are earned over the same period. This method I believe is more accurate in maintaining financial records at the end of the year and providing a better financial look into how a company is managing.
If subsequently resold for a sum larger than the cost, Alcoa should report for the sale of the treasury stock by debiting cash for the sale cost, crediting treasury stock for cost, and crediting additional paid-in capital from repurchased stock for the excess of the selling price over the cost. Adversely, if the stock is retired, Alcoa
Generally accepted accounting principles prescribe the accrual basis of accounting over the cash basis of accounting. The accrual basis of accounting measures the performance of a business by showing in detail every transaction regardless of when the funds are received. Cash basis of accounting only accredits earnings and expenses when money is really being paid out or received. The cash basis of accounting is a less expensive way of keeping records but the failure of using this method is that financing is very difficult because of inaccuracy. The big difference between accrual and cash basis of accounting is when one uses cash basis entries are recorded at the time payment is received.
Materiality is defined by the FASB as an omission that would affect a normal person by a misstatement such as using earnings management to skew the true earnings or revenue. This calls in to play the unethical behavior that earnings management places on the public (violating AICPA Code of Professional Ethics). SOX further required management and accountants to be cognizant of the material errors that financial misstatement and false reporting could have from an ethical standpoint. It holds them accountable for all financial reporting from their company. This includes criminally and financial accountability.
Revenues are recorded when cash is received and expenses are recorded when cash is payment. Cash basis does not meet the requirements of accounting principles (GAAP) for it does not recognize the revenue principle and matching principle. Accrual basis accounting method is recognized when revenue is earned, and expenses accrued. Other accounts have to be created to show the difference between and recognized revenue or expenses and the receipt of cash when disburse. Accrual basis accounting is used by the large businesses in the United States, Canada, and in most foreign countries for the statements is prepared according to the generally accepted accounting principle (GAAP).
The revenue is recorded even if cash has not been received or if expenses have been incurred but no cash has been paid. Accrual accounting is the most common method used by businesses. Cash Basis Accounting is the accounting system that recognizes cash when it is received and bills when they are paid. In the Accrual Basis Accounting revenue is recognized when it is earned and expresses when bills are received, regardless of when cash changes hands. Cash bashes only records revenue when cash is received.
Accrual Basis vs. Cash Basis Accounting ACC 290 Accrual Basis vs. Cash Basis Accounting Cash basis and accrual basis accounting are two principle accounting methods used for keeping track of the income and expenses related to a business. When using the cash basis method, the income is not recorded until actual cash or payment is received and expenses are also not recorded until they are actually paid for. On the other hand when using the accrual basis method, transactions are recorded as soon as the order is made or services rendered, regardless if payment is actually received at the time. The main difference between these two methods is the timing in which the transactions are debited and credited to accounts (Kimmel, Weygandt, & Kieso, 2009). There are certain criteria to consider when deciding which method of accounting should be used for a business.
("The Principles of Commercial Accounting and Fund Accounting", 2011). Accrual vs. Cash Basis Accounting According to the readings, accrual base accounting is defined as in which businesses record, in the periods in which the actions occur, transactions that alter a company's financial statements, even if cash was not traded. In other words, it means that recorded or un-recorded, all dealings are taken and estimated into the overall balance. Cash Basis Accounting, in which an establishment accounts revenue only when it collects cash and an expense only when it pays out cash. This method means that accountants, only takes accountability of the physical cash that is exchanged.
When planning the businesses cash flow, take in to consideration how customers pay. If they pay with credit, it can be months before a payment is received, therefore, rethink the cash flow strategy because most suppliers require immediate payment for new businesses. Failure to price a product or service correctly can also result in business failure. (Ames) Secondly, if a business owner fails to clearly, define their market, their customers, and their customers buying habits, they can cause their
A set of firm-specific characteristics (earning-based bonus plans, debt and political process) linked to Costly Contracting Theory that explains management’s choice of accounting policies. The income increasing/decreasing techniques will applied by the managers. The assumption of PAT is underlying that all individuals’ action is driven by self-interest and they will act in an opportunities manner for the purpose to increase their wealth. This had affecting the wealth of stakeholder and also creates the existence of agency problem. In the agency theory literature, the firm itself is considered to be a nexus of contracts to ensure that all parties acting in their own self-interest, at the same time motivated towards maximizing the value of company.