Ch4

Monday, May 8, 2017 5:46 PM

Accrual basis vs cash basis

• Accrual basis
○ Transactions that change a company’s financial
statements are recordd in periods in which the
events occur
○ Companies recognize revenues when they
perform services
○ Even if cash was not received
○ Companies recognize expenses when incurred
even if the cash was not paid
• Cash basis
○ Companies record revenue t the time they
receive cash
○ Record an expense at the time they pay out
cash
○ Misleading financial statements
○ Fails to record revenue for a company that has
performed services but has not yet received
payment
○ Cash basis accounting is not in accordance with
GAAP (generally accepted accounting principles)