Question

Please search online business press and find a recent article related to “Accrual versus Cash Accounting,” “Revenue Recognition,” or “Accounting Fraud.” Then please provide the webpage link of the article together with the answers to the following questions.

Question 1: How is your article of choice related to topics above and why you think it is interesting?

Question 2: What are the practical implications of this article?

Answer 1

Cash vs. Accrual Accounting :

It's important for you to understand the basics of the two principal methods of keeping track of a business's income and expenses: cash method and accrual method (sometimes called cash basis and accrual basis). In a nutshell, these methods differ only in the timing of when sales and purchases are credited or debited to your accounts. If you use the cash method, income is counted when cash (or a check) is actually received, and expenses are counted when actually paid. But under the more common accrual method, transactions are counted when they happen, regardless of when the money is actually received or paid.

So with the accrual method, income is counted when the sale occurs, and expenses are counted when you receive goods or services. You don't have to wait until you see the money or until you actually pay money out of your checking account. With some transactions, it's not so easy to know when the sale or purchase has occurred. The key date here is the job completion date. Not until you finish a service or deliver all the goods a contract calls for can do you put the income down in your books. 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.

Say you purchase a new laser printer on credit in May and pay $2,000 for it in July, two months later. Using the cash method of accounting, you would record a $2,000 payment for the month of July, the month when the money is actually paid. But under the accrual method, the $2,000 payment would be recorded in May, when you take the laser printer and become obligated to pay for it. Similarly, if your computer installation business finishes a job on November 30, 1999, and doesn't get paid until January 10, 2000, you'd record the payment in January 2000 if you use the cash method. Under the accrual method, the income would be recorded in your books in November 1999.

The most significant way your business is affected by the accounting method you choose involves the tax year in which income and particular expense items will be counted. For instance, if you incur expenses in the 1999 tax year but don't pay them until the 2000 tax year, you won't be able to claim them in 1999 if you use the cash method. But as you should now understand, you would be able to claim them if you use the accrual method, since the very essence of that system is to record transactions when they occur, not when money actually changes hands.

Example 1 Zara runs a small flower shop called ZuZu's Petals. On December 22, 1999, Zara buys new lighting equipment for her shop for which she will be billed $400. She installs the lighting equipment that day, but according to the terms of the purchase doesn't pay for it for 30 days. Under her accrual system of accounting, she counts the $400 expense during the December 1999 accounting period, even though she didn't actually write the check until January of the next year. This means that Zara can deduct the $400 from her taxable income of 1999. Example 2 Scott and Lisa operate A Stitch in Hide, a leather repair shop. They're hired to repair an antique leather couch, and they finish their job on December 15, 1999. They bill the customer for $750, which they receive on January 20, 2000. Since they use the accrual method of accounting, Scott and Lisa count the $750 income in December 1999, because that's when they earned the money by finishing the job. This income must be reported in their 1999 tax return even though they don't receive the money that year. The cash and accrual methods can produce the same results. As you can readily see, the results produced by the cash and accrual accounting methods will only be different if you do some transactions on credit. If all your transactions are paid in cash as soon as completed, including your sales and your purchases, then your ledgers will look the same, regardless of what method you use. What is Revenue Recognition? Revenue recognition is an accounting principle that outlines the specific conditions under which revenue is recognized. In theory, there is a wide range of potential points for which revenue can be recognized. Therefore, IFRS outlines the criteria for revenue recognition with customers. This guide will address recognition principles for both IFRS and U.S. GAAP. Conditions for Revenue Recognition According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied: Risks and rewards have been transferred from the seller to the buyer. The seller does not have control over the goods sold. The collection of payment from goods or services is reasonably assured. The amount of revenue can be reasonably measured. Costs of revenue can be reasonably measured Conditions (1) and (2) are referred to as Performance. Regarding performance, it occurs when the seller has done what is to be expected to be entitled to payment. Condition (3) is referred to as Collectability. The seller must have a reasonable expectation that he or she will be paid for the performance. Conditions (4) and (5) are referred to asMeasurability. Due to the accounting guideline of the matching principle, the seller must be able to match the revenues to the expenses. Hence, both revenues and expenses should be able to be reasonably measured