1. Which basis is accepted by GAAP?

QUESTION: (50-100 words)

Cash vs Accrual Accounting

Hello Current and Future Accountants!

First of all, let me just say that anyone can copy from the text.  I'm not going to ask you to parrot back the definitions of cash and accrual accounting.  I would like for you to describe the two methods in your own words first.  Then, answer the following questions:

Effectively discuss the differences between Cash and Accrual Accounting by answering the following questions:

1. Which basis is accepted by GAAP?

2.  Which method do you believe yields the best picture of what is really happening in the business? Why?

3  Give an example of a business that may be able to use either basis with little or no effect on the outcome of net income.

NAI’s ANSWER: (50 words)

1. The Accrual Accounting system is accepted by GAAP. Cash basis accounting is not. 

2. I think the best method of accounting is the Accrual basis. It certainly paints a better picture for me of how the business is doing verses a Cash basis. Accrual captures real time transactions while Cash systems captures when revenue is received. 

3. The business that I am in, Telecom is driven on Accruals because we are always billing for services. Some challenges we face are when customers do not pay their bills. Then we have to write them off. I can't think of a good cash basis business unless you're a small retailer of some type.

RUBY’s ANSWER: (50 words)

1. Which basis is accepted by GAAP?

            The accrual method is the only one that is accepted by GAAP. Although this is not the only way for someone to show financial statements, it is the only one accepted by the GAAP.

2.  Which method do you believe yields the best picture of what is really happening in the business? Why?

            I honestly feel that the cash-basis method seems to show a more clear picture on regards to what the company has both coming in and going out. The accrual method seems to only show the transaction once it is completed and not when the funds are paid or available. Whereas, the cash-basis method shows when the cash or amount is paid from a client or business.

3  Give an example of a business that may be able to use either basis with little or no effect on the outcome of net income.

            For the accrual method, this may be ideal for a business such as a real estate company/agency. This seems to me to go hand in hand with all of the paperwork that goes into completing for both a home-buyer and a seller. For the cash-basis method, this may be ideal for someone who has a salon or who is a beautician or cosmetologist. This would work better someone in this field or business because it would insure no possible interruption within them running their business.

            The cash-basis method totally reminds me of when I ran my home-based business. Every part of my income was commission and being able to continue to run my business was based on me not having in interruption in me being able to buy more products and supplies. I was not always able to wait until I places the funds into my bank account and wait for them to become available. And on the other hand, I completely understand wanting to have the paperwork for the sake of the business tracking everything as well. It really just depends on what works better for the business, I guess.