Accounting is an important part of any corporation’s financial outlook. A corporation’s financial status is what keeps it in business. Therefore accounting needs to be done correctly and in a timely manner. Commercial accounting and generally accepted accounting principles prefer the accrual basis of accounting over the cash basis of accounting. Both forms of accounting are used in businesses, but most like the accrual basis.
With accrual basis accounting income and expenses are reported in the fiscal period in which they are incurred.Therefore, even if the cash has not been received or the invoice paid it is recorded like the transaction has taken place. This method of accounting is used mostly by large corporations. It shows a much clearer picture of an organizations financial standings.
Income and debts are recorded so that they balance out each month. The income from invoices is recorded even though customers have not paid them yet. Debts are recorded as having been paid as they are incurred, even though they may not be paid for a month or more. With cash basis accounting the transaction is not reported until it actually takes place.
For example, if a bill is owed this month and is not paid until next month, it is not recorded until next month when the money actually comes in. This form of accounting is used mostly by small businesses. When an invoice is given to a customer the payment is not recorded until the customer actually pays it. Likewise if a debt is incurred it is not recorded in the journal until it is paid. A company using cash basis accounting can get a misleading picture of the finances. There could be a large amount of customers all paying their debts during a single month, which would make the company look more affluent that it really is.
