shahbaz assigment.docx - CHAPTER =3 Accrual Accounting &...

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CHAPTER =3Accrual Accounting & IncomeAccrual accounting:Accounting method that records revenues and expenses when they are incurred,regardless of when cash is exchanged. The term "accrual" refers to any individual entry recordingrevenue or expense in the absence of a cash transactionCash base Accounting:The cash method of accounting, also known as cash-basis accounting, cashreceipts and disbursements method of accounting or cash accounting records revenue when cash isreceived, and expenses when they are paid in cashDETAILS OF ACCURAL AND CASH BASE ACCOUNTING:The cash method and the accrualmethod (sometimes called cash basis and accrual basis) are the two principal methods ofkeeping track of a business's income and expenses. In most cases, you can choose which methodto use. Learn how they work and the advantages and disadvantages of each so you can choosethe better one for your business.In a nutshell, these methods differ only in the timing of when transactions, including sales andpurchases, are credited or debited to your accounts. Here's how each works:
ExampleYour computer installation business finishes a job in November, and doesn't get paid until threemonths later in January. Under the cash method, you would record the payment in January.Under the accrual method, you would record the income in your November books.
occurs, and expenses are counted when you receive the goods or services. You don't have to waituntil you see the money, or actually pay money out of your checking account, to record atransaction.Determining the Transaction DateWith the accrual method, sometimes it's not easy to know when the sale or purchase hasoccurred. The key date is the job completion date.When to record income. Not until you finish a service, or deliver all the goods acontractcallsfor, do you record the income in your books.When to record an expense. Likewise, you don't record an item as an expense until the service iscompleted or all goods have been received and installed, if necessary. (If a job is mostlycompleted but will take another 30 days to add the finishing touches, technically it doesn't go onyour books until the 30 days pass.)Choosing an Accounting MethodWhen you can choose either method. Most small businesses (with sales of less than $5 millionper year) are free to adopt either accounting method.

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