In: Accounting
How can different accounting methods impact an organization’s net income?
Answer:
There are two basis of accounting:
Accrual basis of accounting refers to a type of accounting in which revenues and expenses are recorded in the period in which they accrue and not in the period in which they are received or paid.
Cash basis of accounting refers to a type of accounting in which revenues and expenses are recorded in the period in which they are actually received or paid.
Cash basis of accounting does not recognize concepts like outstanding expenses, prepaid expenses, accrued income, income received in advance, etc.
In Income Statement, cash basis of accounting will have expenses and revenues of the amounts that are actually paid or received, but accrual basis will have the amounts that relate to the given period. For example: If insurance expenses of $ 10,00 is paid on July 01, 2019, then in Income statement of 2019,
As per cash basis, expense of $ 10,000 will be recorded,
As per accrual basis, expenses of $ 5,000 (i.e. 10,000 * 6 / 12) will be recorded.
In case of any doubt, please feel free to comment.