The Major Objectives For Business Entity Are To Earn Profit Every Com
The major objectives for business entity are to earn profit. Every company keeps their financial records and prepares their financial reports. There are two main accounting methods which are used to keep recording of the business. They are cash basis accounting (cash method) and accrual basis (accrual method). Compare and Contrast Cash Basis Accounting and Accrual Basis Accounting.
In your discussion define each method. Explain the differences between the two methods and give an example. Give examples of business that are required by law to use Accrual Basis Accounting Instructions: Your initial response should be no less than 250 words with at least one scholarly journal reference (dictionary-type websites are excluded). Reply to at least two of your classmates. Replies to classmates should be a minimum of 100 words and include direct questions. In-text citations and references must be in APA format. Refer to the Forum Grading Rubric below for additional guidelines. Make sure you are using credible sources in your discussions and assignments. Scholarly journals are the preferred source of credible/quality references. These consist of peer-reviewed articles published in academic journals related to the field, which are found via our Library. Websites such as Investopedia, ask.com, answers.com, or dictionary-type websites limit the insight to the topics. Wikipedia is not acceptable as it is not a reliable, credible source of reference. The purpose is to bring in new information and how does it apply to our topic from a real-world perspective, instead of extending on definitions that are found in the book.
Paper For Above instruction
Accounting is fundamental to the effective management and operation of any business. It provides crucial financial information that guides decision-making, evaluates performance, and ensures regulatory compliance. Among the key considerations in accounting are the methods employed to record financial transactions, primarily cash basis and accrual basis accounting. Both methods serve distinct purposes and are suitable for different types of businesses, depending on their size, structure, and regulatory obligations.
Definition of Cash Basis and Accrual Basis Accounting
Cash basis accounting is a method where revenue and expenses are recognized only when cash is received or paid. This approach is straightforward and often utilized by small businesses and sole proprietorships due to its simplicity. Under this method, income is recorded when it is actually received, and expenses are
only recognized when they are paid out. For example, if a freelance graphic designer completes a project in December but receives payment in January, the income is recorded in January when cash is received.
In contrast, accrual basis accounting recognizes revenues and expenses when they are earned or incurred, regardless of when cash transactions occur. This method provides a more accurate picture of a company's financial health, especially for businesses with credit sales or accounts receivable and payable. For instance, if the same graphic designer completes a project in December and invoices the client, under accrual accounting, the revenue is recorded in December when earning occurs, despite the cash being received later.
Differences Between Cash and Accrual Accounting
Recognition of Income and Expenses:
In cash basis, recognition is based on cash flow; whereas, in accrual basis, recognition occurs when transactions are earned or incurred.
Complexity:
Cash basis is simpler and easier to maintain, often suitable for small businesses, while accrual basis is more complex, requiring detailed records of receivables and payables.
Financial Insights:
Accrual accounting provides a more comprehensive view of financial health by matching income with related expenses, whereas cash basis may distort profitability due to timing differences.
Tax Implications:
In the United States, certain businesses, such as corporations and partnerships with inventory, are required to use accrual basis accounting for tax reporting purposes.
Examples and Legal Requirements
For example, large corporations and businesses that deal with inventory are typically mandated by law to use accrual basis accounting. The Sarbanes-Oxley Act and IRS regulations specify that publicly traded companies and certain other entities maintain accrual accounting to ensure transparency and consistency in financial reporting.
Small service-based businesses, like freelance consultants or local retailers, often choose the cash basis due to its simplicity, but those seeking financing or planning for growth may prefer accrual accounting to present a more accurate financial picture.
Conclusion
Understanding the differences between cash basis and accrual basis accounting is essential for choosing the appropriate method aligned with a business’s size, industry, and regulatory requirements. While cash basis is accessible and straightforward, accrual basis offers a detailed and accurate depiction of financial health, vital for strategic decision-making and compliance with legal standards. As businesses grow and seek external funding or go public, the shift to accrual accounting becomes more necessary to meet legal and reporting requirements, ensuring transparency and comparability in financial statements.
References
Epstein, L., & Nach, R. (2016). Financial Accounting for Management. McGraw-Hill Education.
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (16th ed.). Wiley.
IRS. (2020). Publication 538: Accounting Periods and Methods. Internal Revenue Service. https://www.irs.gov/publications/p538
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial accounting: IFRS edition. Wiley. Harvard Business Review. (2021). The importance of accurate financial reporting for business growth. HBR.org.
BBC. (2022). Accounting and Business Ethics. BBC News Business.
Investopedia. (2023). Difference Between Cash and Accrual Accounting. https://www.investopedia.com/terms/a/accrualaccounting.asp
AccountingTools. (2023). Cash Basis vs. Accrual Basis.
https://www.accountingtools.com/articles/2017/5/8/cash-vs-accrual-accounting