Comparing Accrual and Cash Basis Accounting

This topic provides an overview of the concepts of Accrual Basis and Cash Basis accounting, and covers the following topics:

• About Accrual Basis Accounting
• Using Aptify for Accrual Basis Accounting
• About Cash Basis Accounting

About Accrual Basis Accounting

Accrual basis accounting is the process of relating the financial effects of transactions, events, and circumstances having cash consequences to the period in which they occur rather than when the cash receipt or payment occurs.

Accrual accounting:

• Encompasses the matching principle, which states that the total expenses involved in obtaining the revenues of the period must be computed and related to the revenues recorded for that period before the income of a company may be determined.
• Is the primary accounting method under Generally Accepted Accounting Principles (GAAP).
• Attempts to reflect an accurate measurement of a company's financial position, results of operations and cash flows.
• Attempts to prohibit income manipulation.

Revenue under accrual basis accounting is recorded and reported when: (1) realization has taken place, and (2) the earning process is complete or nearly complete.

• Realization is the process of converting non-cash resources into cash or rights to cash.
• Earning process is the acquisition, production and/or distribution, sales, and collection of cash. Earning process is complete or nearly complete when the company has accomplished what it must do to be entitled to the benefits.

Expenses under accrual basis accounting have the following criteria:

• Matching: Allocation of expenses incurred (efforts) against revenues (benefits) earned during the period.
• Association of Cause and Effect: Costs recognized as expenses based on direct association with revenues.
• Systematic and Rational Allocation: Costs recognized as expenses based on systematic and rational allocation (e.g., depreciation and amortization).
• Immediate Recognition: Costs recognized as expenses in the current period because either there are no discernible future benefits, or it is not useful to allocate those costs to future periods.

Using Aptify for Accrual Basis Accounting

By default, Aptify incorporates accrual basis accounting methods for sales. Note that setup for deferred income accounts is required in order to facilitate accrual basis accounting for subscription products.

An example of Journal Entries using accrual basis accounting follows:

Transaction 1: On June 1, using the Aptify Order Entry system, the National Headquarters organization sells an annual membership to the World Crocheting Organization for $1,200.00 on Credit.

Accounts Receivable			Sales
(Debit) May 1 $1,200			(Credit) May 1 $1,200

Transaction 2: On June 15, using the Aptify Payments service, the National Headquarters organization receives payment for the annual membership that was sold to the World Crocheting Organization for $1,200.00.

Cash			Accounts Receivable
(Debit) May 15 $1,200			(Debit) May 1 $1,200	(Credit) May 15 $1,200

Deferred Revenues			Membership Revenues
(Debit) 05/15/06 $100.00 06/01/06 $10.00 07/01/06 $100.00 08/01/06 $100.00 09/01/06 $100.00 10/01/06 $100.00 11/01/06 $100.00 12/01/06 $100.00 01/01/07 $100.00 02/01/07 $100.00 03/01/07 $100.00 04/01/07 $100.00 05/01/07 $100.00	(Credit) 05/20/06 $1,200.00		(Debit)	(Credit) 05/15/06 $100.00 06/01/06 $100.00 07/01/06 $100.00 08/01/06 $100.00 09/01/06 $100.00 10/01/06 $100.00 11/01/06 $100.00 12/01/06 $100.00 01/01/07 $100.00 02/01/07 $100.00 03/01/07 $100.00 04/01/07 $100.00 05/01/07 $100.00

About Cash Basis Accounting

In cash basis accounting, the income of a company is computed for an accounting period by subtracting the cash payments from the cash receipts for operations. Some concerns about this method of accounting include:

• Cash basis accounting is not in conformity with Generally Accepted Accounting Principles (GAAP).
• This method may lead to incorrect evaluations of a company's operating results because the receipt and payment of cash may occur much earlier or later than the sale of goods or the providing service to customers (benefits) and the related costs (sacrifices).
• A company's books maintained on a pure cash basis generally have no balance sheet.