The Difference between Accrual and Cash Basis of Accounting - Case Study Example

In the cash basis of accounting, the revenues are reported on the income statement when the cash payments are received from the customer. If, for example, Master Movers sold packing materials worth $2000 on a cash basis, the amount will not be included in the income statement until the cash payments are made. Under the accrual basis, the $2000 will be included in the income statement immediately after the sale, while the cash payment will be done on a later date(Master Movers  4).

Using the accrual basis of accounting, the business expenses are recorded on the income statements in the period when they occur, which is a different period from when the payments are made. On a cash basis, the expenses are only recorded on the income statement after they have been paid out.

For Master movers, For example, spend $2000 on advertisement under the cash basis, the $2000 will be included in the income statement only when then the cash is paid out while under the accrual basis, the $2000 will be recorded on the income statements when they get the bill, and before the amount is actually paid out.

The main reason the profits realized in the income statement for the past financial period were lower than expected was that the records were made in line with the cash basis of accounting, thus leaving out most of the transactions. The transactions included in the Master Mover’s record mostly contain the transactions that were already paid up in cash leaving out those that were yet to be paid up. If all the transactions carried out over the financial period were included in the records, the profits would be higher (Master Movers 2).

The cash basis of accounting is mostly considered for small businesses and management of personal finances where most sale payments and payment of bills are done immediately. The accrual basis can be considered as the best accounting method for Master Movers because considering the matching principle of the accrual accounting method; the company’s expenses should match with the revenues earned over the same financial period.

Income statements prepared under the accrual accounting method include all the revenues earned and all the expenses incurred over the specified financial period. In this case, the realized profits will be higher. Higher profits portray a better financial position of the company. Master movers need to portray a good financial position to the vendors, external users and investors so as to attract more potential investors. It is for this reason that the accrual method should be considered.