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There are two basic methods of accounting that businesses use to track and report revenues: Under the accrual basis, revenues are recorded on a company's income statement when they are earned, regardless of when cash is actually received. Similarly, under the accrual method, expenses are matched with related revenues and recorded when they occur, not when they are paid for.

By contrast, under the cash basis, revenues are not recorded until cash is actually received in hand, and expenses aren't recorded until they're actually paid. It doesn't matter when you receive the money; you're obligated to report it as earned revenue as soon as you become aware of the sale.

The same concept applies to expenses. Advantages of the accrual basis The accrual basis of accounting provides a more accurate picture of a company's profitability during a specific accounting period. An income statement prepared using the accrual method will report all revenues earned during the period it seeks to cover, as well as all of the expenses incurred to bring in those revenues.

The accrual basis of accounting also shows how well a company is faring financially at a given point in time, because under this method, all earned assets and liabilities must be reported.

The matching principle The matching principle is a component of the accrual method and requires that companies match revenues with the expenses incurred to earn them by reporting both at the same time.

How to calculate Accrual and Cash basis net income? | Yahoo Answers

By recognizing expenses in the period during which they are incurred, a company can see how much money it is spending to bring in revenues.

Choosing between the accrual and cash basis Small businesses generally have the option to choose between the accrual and cash methods of accounting, and many opt for the cash basis because it is less complex.

Businesses that stock inventory, however, are almost always obligated to use the accrual method. If you came to this article looking for information on stocks, we can help.

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Accrual Basis vs. Cash Basis Accounting - Their Impacts on the Financial Statment

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