Accounting

Week 3: Individual Summary

Kiley Osborn

ACC/290

August 27, 2012

Lisa Henderson

Week 3: Individual Summary

Cash Basis

In accounting there are two separate systems a company may use to keep their financials in order. The first system is the cash basis accounting system. The cash basis system recognizes income only when payment is received and recognizes expenses only when payment is made. This is why mostly sole proprietors and businesses with no inventory use this system (Entrepreneur Media, Inc, 2012).

Accrual Basis

The second system which is widely used throughout corporate America is the accrual basis accounting system. The accrual basis accounting system tracks income when the sale occurs, and expenses are counted when they receive the goods or services. A company does not have to wait until they see the money, or actually pay money out of their account, to record a transaction (Business Accounting & Finances, 2012).

Pros and Cons

Both of these types of systems benefit each company differently and have different aspects to each system. Each has their own equation that helps keep track of how to balance the books. The cash basis system’s equation is “cash in – cash out = profit or loss” (Reider, 2007). This is important the company follows this equation because with this system effective cash management is essential to the company’s survival. The cash system also allows for quicker means of balancing the books. However, one negative aspect of the cash system is that it does not allow for easy record keeping of a company’s financial records.

The accrual basis system of accounting does allow of a more accurate record keeping system of a company’s financial records because of the financial statements put out (Business Accounting & Finances, 2012). The accrual basis system also uses an equation to help keep balance in the books. The equation is “assets = liabilities + equity”. For every transaction on the asset side there must be a transaction...