Cash-based accounting is the method by which customers do not pay before the invoice arrives. The accrual accounting method is the opposite of the cash system and is used by more companies. Companies that use accrual accounting methods record revenue when work or services are completed, rather than when they receive cash. Customers may not have paid for the company yet, but they have already won it, so they recorded it. If the company has any fees, they will handle it in the same way. In order to get the job done, anything the company needs to buy is usually purchased on the account until the company receives the bill.
Accrual accounting methods are more difficult to implement and maintain than cash-based methods, but they provide a more reliable picture of how the company works. Fees and revenues are coordinated, letting the company know how much they bring each month and how much they spend.
An example of how these two methods have completely different financial results is to compare a paint company using cash-based accounting methods and accrual accounting methods: a paint company contracts with customers for a total of $2,000. The painter hopes to get a profit of $500, which means his total supply will reach $1,500. The contract says he will start work on December 19, 2014 and complete his work in December. The painter's agreement to pay when completing the work means that he was paid in the first week of 2015. If his company uses a cash basis, the artist does not have to report the salary in the 2014 tax report. Method, even if this is the painter at work. The company did leave the fees paid in the 2014 tax report. The company's 2014 tax will be much lower. If the same company uses an accrual method to record its business, the fees and payments will be credited to the book when it actually occurs on December 31, 2014. The company's net income is higher because of their taxes. Since the customer has not paid for the company when it sells in its books, the amount of cash they have may not be clear. If a small number of customers do not pay their bills, the company may experience huge cash flow problems.
Orignal From: Accrual accounting method
No comments:
Post a Comment