Question

Bozrah Industries, a small independent retailer, wants to change its accounting system from cash-based to accrual-based and is concerned about how this change will affect the recording of sales and expenses.

Answer 1

Under cash based accounting transactions are recorded as thecash is paid or received.That is the revenue is recorded when we have actually received the cash for services provided or goods sold.

Similarly expenses are recorded when the cash is actually paid for the expenses.

While under accrual basis of accounting transactions are recorded when actually they are incurred.So sales is recorded when the services are provided or goods are sold and no matter cash is received or not.

Similarly expenses are recorded in month when they are actually incurred and no matter when they are padi.

So if Bozah industries is now moving from cash accounting to accrual accounting.Now it will recorde sales when actually incurred and will recorde a asset (Accounts receivable) for the sales not done in cash, earlier it would have not recorded any asset and recorded sales only when cash was received.If cash is received in advance for the services or goods sold then a laibility is created for the services not provided.

Similarly expenses are to be booked in period when incurred and if not paid in cash a liability is recorded for the amount not paid in cash.Similarly if cash is paid for expense in advance for future periods a asset is created prepaid expense account and expense is recognised in period when actually incurred.