Question

Describe how you can apply the concepts of accrual and cash accounting to your personal life or professional career.

Answer 1

The cash basis of accounting recognizes revenues when expenses when they are paid and cash is received. This method will not recognize accounts payable or accounts receivable. Conversely the accrual basis, revenues and expenses are recorded when they are earned, regardless of when the cash is actually paid or received. This method is more commonly used in comparison to the cash method.

Deciding whether the business should keep accounting records on cash or an accrual basis depends on the type of business, plans for its future size, and it's accountability to third parties, such as shareholders and lenders. Accrual basis accounting is more widely used and is also considered the basis for generally accepted accounting principals or GAAP that targets to serve the businesses of all sizes and complexities. Cash-based accounting is generally used by business owners who have no employees or inventory

For accounting my personal life as well as professional finances, I will give preference to the accrual accounting because it will reflect the picture when the funds have been earned. In cash accounting I would receive the same amount at the same time but it would be harder to manage when it should be utilized; and provide me with more realistic idea of income and expenses during a period of time frame.