I. Cash Basis of Accounting
A. Cash Basis - Follows Cash - Transactions are recorded based on timing of cash
inflows and cash outflows
1. Revenues are recorded when cash is received
2. Expenses are recorded when cash is paid
B. Credit sale of $10,000 on 11/15
1. Customer pays cash on 12/5
2. Sale is recorded on 12/5
C. If utility bill received on 11/15
1. Company pays the bill on 12/5 - Expense is recorded on 12/5
D. Sale is made when cash is received
II. Accrual Basis of Accounting
A. Accrual basis - transaction is recorded based on timing of right to receive income,
or obligation to pay expense
B. Company makes merchandise credit sale of $10,000 on 1/15 - sale is recorded on
11/15 - no matter when payment is received
1. On 11/15 the company obtained the right to obtain the cash
C. If utility bill relates of November, then expense is recorded in November, even
though payment can happen in December
1. REQUIRED BY GAAP
a) Generally Accepted Accounting Principles
D. Completely disregards cash inflows and outflows for timing
III. Accrual basis of accounting - principles
A. Revenue recognition
1. Timing
a) Right to receive by discharging obligation
b) Company makes sale of 20,000 on 11/15 - revenue MUST be
recognized on date of delivery of merchandise
2. Measurement
a) Must be measurable in monetary terms
3. Assurance of Payment
a) Reasonably sure of receiving payment
b) If customer is bankrupt, or if it is a gift, and no payment can be
expected, must not be recognized as revenue
B. Matching
1. Recognize in the same period expenses that match the revenues
IV. Buzz Words
A. Accrual
1. Earned
2. Incurred
B. Cash
1. Paid
2. Received
3. Collected
V. Example Accrual basis
A. During the year a Company earned revenues of $820 million. Expenses totaled
$520 million. The Company collected all but $20 million of the revenues earned
and paid $610 million of its expenses.
1. Under the Accrual Basis of Accounting what would the company report as
net income?
Revenues $820 million
(Expenses) $520 million
Net Income $300 million
VI. Example Cash Basis
A. During the year a Company earned revenues of $820 million. Expenses totaled
$520 million. The Company collected all but $20 million of the revenues earned
and paid $610 million of its expenses.
1. Under the CashBasis of Accounting what would the company report as net
income?
Revenues $800 million
(Expenses) $610 million
Net Income $190 million
VII. Revenue / Expense Recognition
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