Accounting: Cash Basis or Accrual Basis? Both?

7/15/2011 Tina Noa ERP

Cash Basis and Accrual Basis differ in the manner in which they deal with the issue of when to recognize revenues and expenses. The Cash Basis focus is, as its name implies, on the flow of cash. That is to say, whenever cash is collected, revenue is recognized as having been earned. A similar basis for the recognition of expenses is used, namely whenever cash is disbursed the related expense is recognized as having been incurred.

In Accrual Basis, the test for revenues is when it is earned. Revenue is generated as a result of a business’s performance in an economic exchange. That is to say a business enters into a contractual agreement to exchange a performance for a consideration, which will culminate in the receipt of cash. When it completes that performance, it is entitled to receive that cash; it has earned it as revenue. At that time revenue is recognized.

The recognition of expenses follows in a similar manner. The Matching Concept in accounting makes it imperative that we match all expenses against the revenue that they help to generate. Expenses then follow a similar pattern to that of revenue. When expenses are matched in this manner, they are said to have been incurred. At that moment, they must be recognized as an expense. This recognition is independent of the actual payment. Cash is not the criteria for recognition.

Many systems operate as an accrual basis system, and the cash basis cannot be calculated. Some systems do provide options for viewing reports in Cash or Accrual basis. This is a good feature because it allows a company to report on a cash basis, but still have tools to run reports to compare and review both sets of criteria.

However, many companies operate on a cash basis for reporting of taxes and financials, but still need to be able to view information on an accrual basis. So, when you can only operate on either an accrual basis or a cash basis, you may want to find a solution to enable the system to calculate in both Accrual and Cash Basis modes so that you are not limited to a printed report for each method that must be manually compare on printed documents.

Think about how you want the revenues and expenses to be calculated. If you have the need to do both, explore the add-on market to find the solution that works for your system. Or check out Cash Basis Accounting for Dynamics NAV (a tool that allows the company to be able to view, in real time, a side by side comparison of each account in accrual, cash, and the difference between them) to see if it brings you what you need.

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