Accrual and Cash Accounting

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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. Cash accounting is when companies record revenue only when cash has been received. Cash accounting even if the service was rendered if no cash was received the company will not record the expense. By only recording expenses when bills are paid, the company may be able to shift expenses into other periods in order to make the company look more profitable simply by manipulating when payments are made. This can make the financial statements misleading. Both methods are way of recording transactions the only difference is when the number hits a company’s bottom line. An account may use the cash basis accounting when the company’s is small and the books are kept on the actual flow of cash coming in and out. This is used normally with a company with no inventory or a sole proprietor. They typically use this method because it requires fewer journal entries for closing an accounting period and creating financial statements. I feel this method only gives the owner or company a view on the cash coming in and out but does not give the company a long term view on the overhead cost and revenue for services in order to show the company where improvements can be made or where costs

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