Cash Basis Accounting Essay

463 Words2 Pages
In every line of work there are many guidelines or principles one must follow to stay on the right path. Commercial accounting also has some principles that it must abide by. In commercial accounting there a two accepted principles that need to be considered. These principles are called the matching and revenue recognition principles. The revenue principle works on the basis that companies must recognize revenues in the accounting period in which revenue is earned. The matching principle on the other hand allows expenses to follow revenues and by doing this, expenses are matched with revenues in the period when efforts were expended to generate revenues. Another key concept in commercial accounting is, knowing the difference between accrual and cash basis accounting. Accrual basis accounting means that, “transactions that change a company’s financial statements are recorded in the periods in which the events occur, even if cash was not exchanged”. (Kimmel, 164). In accrual basis companies recognize revenue when earned even if they do not collect cash at that time thus using the revenue recognition principle. They also recognize expenses when they are incurred even if they did not pay cash at that time which is following the matching principle. Cash basis accounting on the other hand means that the, “companies record revenue only when cash is received. They record expense only when cash is paid”. (Kimmel, 164). Cash basis accounting is not accepted under the general accounting principle because it fails to record revenue when it is earned, which is in violation of the revenue recognition principle. It also does not record expenses when incurred which also violates the matching principle. The authors Kimmel, Weygandt, and Kieso give a very good and simple example explaining how accrual and cash basis differ. In the book they give an example of a
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