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Generally Accepted Accounting Principles(GAAP) require that a business uses “accrual basis". Under this method Revenue and Expenses are recognized as earned or incurred. An alternative method in use by some small businesses is the “cash basis". The cash basis is not compliant with the GAAP , but small business that does not have a broad base of shareholders or creditors does not necessarily need to comply with GAAP. Under this easy approach, revenue is recorded when cash is received(no matter when it is “earned”),and expenses are recognized when paid(no matter when ”incurred”) 9/17/2011 Basis of Accounting 2 Cash Basis Accrual Basis
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9/17/2011 Basis of Accounting 3
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9/17/2011 4 Basis of Accounting Event Cash Basis Accrual Basis Article ordered from supplier No effect No effect Article arrives in Inventory No effect Increase accounts payable and Increase Inventory Article is used No effect Decrease inventory and Decrease fund balance Article is paid for Decrease cash Decrease fund balance Decrease cash Decrease accounts payable
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9/17/2011 Basis of Accounting 5 Thank You