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

CHAPTER =3
Accrual Accounting & Income
Accrual 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 recording
revenue or expense in the absence of a cash transaction
Cash base Accounting:
The cash method of accounting, also known as cash-basis accounting, cash
receipts and disbursements method of accounting or cash accounting records revenue when cash is
received, and expenses when they are paid in cash
DETAILS OF ACCURAL AND CASH BASE ACCOUNTING:
The cash method and the accrual
method (sometimes called cash basis and accrual basis) are the two principal methods of
keeping track of a business's income and expenses. In most cases, you can choose which method
to use. Learn how they work and the advantages and disadvantages of each so you can choose
the better one for your business.
In a nutshell, these methods differ only in the timing of when transactions, including sales and
purchases, are credited or debited to your accounts. Here's how each works:
Example
Your computer installation business finishes a job in November, and doesn't get paid until three
months 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 wait
until you see the money, or actually pay money out of your checking account, to record a
transaction.
Determining the Transaction Date
With the accrual method, sometimes it's not easy to know when the sale or purchase has
occurred. The key date is the job completion date.
When to record income. Not until you finish a service, or deliver all the goods a contract calls
for, 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 is
completed or all goods have been received and installed, if necessary. (If a job is mostly
completed but will take another 30 days to add the finishing touches, technically it doesn't go on
your books until the 30 days pass.)
Choosing an Accounting Method
When you can choose either method. Most small businesses (with sales of less than $5 million
per year) are free to adopt either accounting method.