Required: Week 3 Discussion On Two Topics

Requiredthe Week 3 Discussion Consists Of Two Topic1 What Are The

Required: The Week 3 Discussion consists of two topics. (1.) What are the differences between cash and accrual basis accounting? Provide an example of each. (2.) Accrual accounting requires adjusting entries. Provide an example of an adjusting entry. Ensure to NOT USE non-credible sources such as dictionaries, Wikipedia, Investopedia, AccountingTools, AccountingCoach, and blogs. MUST CITE WITHIN THE POST. Please do NOT USE FIRST PERSON. NO BIG, LONG PARAGRAPHS. 250 word minimum.

Paper For Above instruction

Introduction

Accounting methods fundamentally influence how financial information is recorded, interpreted, and reported. The two primary methods are cash basis and accrual basis accounting, each with distinct characteristics, advantages, and usage contexts. Understanding these differences is essential for accurate financial management and reporting.

Differences Between Cash and Accrual Basis Accounting

Cash basis accounting records revenues and expenses only when cash is received or paid. This method provides a straightforward view of cash flow but may not reflect the company's current financial position, especially when transactions occur over extended periods. For example, a company recognizes revenue only when customers pay, and expenses are recognized when payments are made. This approach is common among small businesses due to its simplicity (Kieso, Weygandt, & Warfield, 2019).

Conversely, accrual basis accounting records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged. This method offers a more accurate depiction of a company's financial health, aligning with the matching principle that expenses should be matched with the revenues they generate. For instance, if a company performs services in December but receives payment in January, under accrual accounting, the revenue is recognized in December (Kieso et al., 2019).

Example of an Adjusting Entry in Accrual Accounting

An adjusting entry is necessary in accrual accounting to recognize revenues or expenses that have been earned or incurred but not yet recorded at the end of an accounting period. For example, if a company earns $5,000 in services in December but has not yet billed the client, an adjusting entry is needed to record accounts receivable and recognize revenue. The journal entry would be:

Debit: Accounts Receivable $5,000

Credit: Service Revenue $5,000

This ensures that the financial statements accurately reflect the income earned during the period, consistent with accrual principles (Kieso et al., 2019).

Conclusion

Understanding the distinctions between cash and accrual accounting helps businesses choose the appropriate method for their operations. While cash basis offers simplicity, accrual basis provides a comprehensive view of financial health, supported by necessary adjusting entries to ensure accuracy.

References

  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
  • Loughran, M. (2010). Financial accounting theory. South-Western Cengage Learning.
  • Schneider, D. (2020). Financial Accounting: Tools for Business Decision Making. Cengage Learning.
  • Horngren, C. T., Sundem, G. L., Elliott, J. A., & Philbrick, D. R. (2018). Introduction to Financial Accounting. Pearson.
  • Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2020). Financial Accounting IFRS Edition. Wiley.
  • Stickney, C. P., Brown, P., & Wahlen, J. M. (2018). Financial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning.
  • Rees, L., & Carlon, S. (2020). Principles of Accounting. FlatWorld.
  • Givens, V., & Vasilev, V. (2020). Principles of Financial Accounting. McGraw-Hill Education.
  • Keiso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
  • Harrison, W. T. (2016). Accounting Principles. McGraw-Hill Education.

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