Accrual Basis over Cash Basis Accounting Essay

There ar two score methods that companies use to report tax incomes and expenses. The two methods are the accrual radical and interchange footing. The difference in the accounting system processes will fundamentally change the way the organization reports its cash, so a decision must be made prior to recording any transactions.Accrual Basis AccountingAccrual basis accounting is the method accepted by commercial accounting and the general accepted accounting principles. Accrual-basis accounting doer that transactions that change a companys financial statements are recorded in the periods in which the event occur, even if the cash was not exchanged. (Kimmel, Weygandt, & Kieso, 2009) This accounting method follows both the revenue actualization principle, by insurance coverage the revenue when it is earned and the matching principle by reporting the expense when it is incurred. Recording revenue before the money has come in can potentially misrepresent a firms financial resul ts, allowing a company to show sales that may never actually be stipendiary for (say, because of financial problems with the buyer). (Cash Basis Vs. Accrual Basis Accounting, 2002) Accountants choose the accrual method of accounting over the cash basis because it to a greater extent accurately represents the companys finances.Cash Basis AccountingCash basis accounting is the other method of reporting revenues and expenses. When using cash basis accounting, companies record revenue and when cash is received. They record expense save when cash is paid. (Kimmel, Weygandt, & Kieso, 2009) This method does not follow the revenue recognition principle or the matching principle, therefore, is not a generally accepted accounting principle for wide corporations. The IRS altered its position in 2000, allowing taxpayers who have gross receipts of $1 million or less(prenominal) to use the cash method (Rev. Proc. 2000-22). (Gilmore & Miller, 2003) This change allows for small businesses to us e the cash basis method, so they are only paying taxes on income received. The cash basis accounting method benefits small businesses and individuals but is not an ideal choice for large corporations.A company must decide what accounting process is more beneficial prior to recording any transactions as thisaffects the way they record the information. The accrual basis method records the revenue and expenses when they occur, and the cash basis method records revenue only when cash is received and expenses only when paid. The cash reporting method tends to misrepresent an organizations financial performance by reporting expenses prior to receiving payment for the service. The accrual basis accounting method reports financial transactions more accurately and, therefore, is the most appropriate choice for large businesses.