Accounting 301-Discussion Board
In the cash basis accounting revenues are reported in the same period that cash is received from customers. When the cash is paid out expenses are reported on the income statement. In the accrual basis of accounting revenues are reported when they are earned, which most of the time happens before customers pay out the cash. Unlike cash basis, in accrual basis, expenses are reported on the income statement in the same period they occur. Accrual basis accounting oftentimes provides a more accurate picture of a company’s profits during an “accounting period.” The reason for this is that the income statement that is prepared during this period reports all revenues that were actually earned during the period, as well as the expenses that incurred in order for the revenues to be earned.
In accrual accounting the model to measure resources sacrificed to earn revenues (measure of resources provided by business operations) is called expenses. Net income is the result of the difference between revenues and expenses; we would get a net loss if expenses were greater than revenues. Using accrual accounting we are able to get a more accurate calculation of forthcoming operating cash flows and a more realistic depiction of the “periodic operating performance of the company.” Net operating cash flow is the measure that is used in cash based accounting. This method measures the difference between cash receipts and cash payments from transactions relating to providing goods/services to customers during a reporting period. Net operating cash flow becomes a variable of worry over the life of the company. During short periods of time operating cash flow proves to not be an accurate predictor of future operating cash flows. Of these two methods, net income, is considered by most to be the best indicator of “future operating cash flows than is current net operating cash flow.”
A general definition for adjusting entries is conversions from cash basis to accrual basis.
In accrual accounting the model to measure resources sacrificed to earn revenues (measure of resources provided by business operations) is called expenses. Net income is the result of the difference between revenues and expenses; we would get a net loss if expenses were greater than revenues. Using accrual accounting we are able to get a more accurate calculation of forthcoming operating cash flows and a more realistic depiction of the “periodic operating performance of the company.” Net operating cash flow is the measure that is used in cash based accounting. This method measures the difference between cash receipts and cash payments from transactions relating to providing goods/services to customers during a reporting period. Net operating cash flow becomes a variable of worry over the life of the company. During short periods of time operating cash flow proves to not be an accurate predictor of future operating cash flows. Of these two methods, net income, is considered by most to be the best indicator of “future operating cash flows than is current net operating cash flow.”
A general definition for adjusting entries is conversions from cash basis to accrual basis.
References: BIBLIOGRAPHY Averkamp, H. (n.d.). What is the difference between the cash basis and the accrual basis of accounting? Retrieved October 23, 2014, from Accounting Coach: http://www.accountingcoach.com/blog/cash-basis-accrual-basis-of-accounting Shadunsky, A. (n.d.). What is the Purpose of Adjusting Entries in Accounting? Retrieved October 23, 2014, from eHow: http://www.ehow.com/info_12030724_purpose-adjusting-entries-accounting.html Spiceland, S. N. (2013). Intermediate Accounting. New York, NY: McGraw-Hill Irwin.