Cash and Accrual Methods?
Carmen opens a retail store. Her sales during the first year are $600,000, of which $30,000 has not been collected at year-end. Her purchases are $400,000. She still owes $20,000 to her suppliers, and at year-end she has $50,000 of inventory on hand. She incurred operating expenses of $160,000. At year-end she has not paid $15,000 of the expenses. a) Compute her net income from the business assuming she elects the accrual method. b) Compute her net income from the business assuming she elects the cash method. C) Would paying the $15,000 she owes for operating expenses before year-end change her net income under accrual method of reporting? under the cash method? Additional key question: how is inventory calculated under the cash method?
What is an accrual basis?
In accounting, the accrual basis refers to a specific method of accounting for a firm’s income and expenses. To record income and expenses on an accrual basis is to record expenses when they are incurred, as opposed to when they are paid for in cash. Similarly, on the accrual basis, income is recorded as it is earned, as opposed to when cash payment is received. This principle is usually accounted for in the balance day adjustments.
Accrual vs. cash basis of accounting?
You will have a deeper understanding of your business with an accrual basis accounting. The reason is that this system takes into account money that others owe to you (i.e. customers) , money that you owe to others (i.e. suppliers), cash that you have but actually is not yours (i.e. taxes that you collected but you will pay to the Government), etc. At the same time, you need to project your cash on an on-going basis. The main reason to go out of business is not paying attention to cash needs, and look only to accrual accounting.
Which accounting method: accrual or cash-basis?
If you're asking whether you chose the correct method, there probably isn't any one correct method (certain larger businesses are required to use accrual, but I'm assuming you're not). If you're just asking for advice about which method would benefit you most, then you should consult a CPA.
Should I use cash or accrual method of accounting for my Ebay store?
CASH SYSTEM income is declared when payment is received so taxes are paid from money you have already been paid expenses are claimed when actually paid for ACCRUAL SYSTEM income is declared when invoice is issued even if money has not been received yet so taxes are to be paid even if you have not received the money. expenses are claimed when invoice received (even if not yet paid) considering that you are accounting for an ebay store and presumably you are receiving the money before sending items then either one will do - but for tax purposes if you want to claim expenses even if they have not yet been paid then the accrual system will probably work better for you either way, make sure that you are using the double entry system of bookkeeping - and keep it up to date - it makes things easier in the long run
Cash vs Accrual Basis Accounting?
I'm writing a ten page paper on different accounting types, but I'm having trouble finding enough to fill up ten full pages (double spaced). Here's what my paragraphs look like so far: 1. Introduction 2. Difference in the two accounting types 3. Advantages/disadvantages of cash basis 4. Advantages/disadvantages of accrual basis 5. When to use one method over another and legalities of each method 6. Conclusion So far with these paragraphs, its 4 pages long. I have fluffed them up enough that if I did any more it would be repetitive and a bad essay. Any suggestions of other points I can add into the essay to help create 6 more pages? sigh..
Is the statement of cash flows accrual basis or cash basis?
The purpose of a cash flow statement is to give a clear picture of cash in the business. 3 broad levels are examined. 1. Operating Cash2. Cash from financing3. Cash flow from investing activityThe statement ties the balance sheet and income statement to give a picture of "how cash flows in the business".1. Adjustments for non cash expenses are added (depreciation). A business with 100$ ebitda may not actually be creating 100$ from operations. Quite possible that a revenue of 10$ is recognized while the payment was not received. So your actual operating cash might be 90$. That 10$ adjustment will come from BS where receivable would have gone up by 10$. Vice versa is true too!Similarly interest payments are reflected in IS but not repayment of principal. So in reality business would have paid more cash than the actual expenses in IS. This swing is reflected in the BS where debt outstanding would have refused.... And so on.. So in principle.. What CF does is to use acrrual numbers to get an idea of actual cash expenses...
Cash vs. Accrual Accounting?
How you determine basis or the amount to capitalize can be different on cash basis vs. accrual. If you buy an asset like a computer on a short term account payable before year end but pay the account in the following year then the basis for cash basis is 0, but on accrual basis the asset is recorded when purchased. For asset financing though both methods have the same result even though cash is paid out over a period of time and not all at once. This is because the liability and the asset are recorded as though the cash was loaned to the company and then used to buy the asset. Then the note payments are made to repay the debt over time.
Accrual vs. Cash Basis Accounting - what's the difference?
Cash = Revenues and expenses are reported only when cash is received or paid. IF cash is exchanged you will report it on the Cash Basis, you will not show sales on account or purchases on account. You will expense inventory purchases when paid for. Advertising Expense 800 Service Revenue -1500 Cash 700 Accrual = Revenues and expenses are reported when earned or incurred. IF a transaction occurs where an Asset is either acquired or consumed, Revenue is earned or an Expense is incurred you will book the transaction immediately and recognize inventory or expense when goods or services are received or payments in advance as a prepaid. Revenue is booked as soon as goods are shipped and customer accounts are debited, or services are rendered to customers. Advertising Expense 800 Service Revenue -1500 Accounts Receivable 1500 Accounts Payable -800 Accounts Receivable -1500 Accounts Payable +800 Cash 700 To understand more read this: easy to follow http://www.principlesofaccounting.com/ch...