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Q. What is "accrual" vs. "cash" accounting?

A. In the easiest kind of company, say a lemonade stand, all transactions are in cash. However, most companies use and grant credit. Furniture dealers often offer several months before payment need be received from consumers. Similarly many companies purchase from
suppliers using credit.

This presents a dilemma to bookkeepers. When should a sale be recognized? Is it when the item is shipped or when the cash is received, or somewhere in between?

The income statement is based on the "accrual" principle, i.e. a sale (or cost of sale) should be recorded when the item is shipped.
[The cash flow
statement is based on when the cash actually comes in. In the case of the furniture company, "income" (i.e. the sale) is recorded before the cash is received. For a purchase using credit, the "cost" is recorded before cash is spent.] Should be in its own section, not with accounting method.

Way, way too wordy and very inaccurate. There is no real dilemma since it is generally quite clearly governed by IRC, SEC, FASB and GAAP. In any case, a bookkeeper would not be the one determining accounting method. If there is a choice to be made, an accountant would make it, not the bookkeeper.

Cash basis accounting recognizes income on the date when received regardless of the date services were rendered or items were shipped and recognizes expenses on the date when paid regardless of the date the goods were received or the services were rendered for the company.

Accrual basis accounting recognizes income on the date services were rendered or the item(s) were shipped regardless of when payment is actually received and recognizes expenses as of the date goods are received or services are rendered regardless of the date they are actually paid for by the company.

Income statements may be based on either method of accounting but must be based on the method used by the company for tax purposes.

All public companies are required by SEC (and IRS) to use the accrual method of accounting.

Small companies with inventory may use the hybrid method of accounting which accounts for the cost of goods sold on the accrual method of accounting with all other things being accounted for using the cash method or any acceptable hybrid method of accounting that will accurately reflect inventory and cost of goods sold.
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