Accounting - Cash and Accrual - Essay Example

There are two basic systems that can be utilized to run an accounting information system. The two accounting systems are cash and accrual basis accounting. This report analyses, compares and contrasts the two accounting systems that can utilized by an accountant in the industry. The cash basis accounting system recognizes revenues when cash is received, and expenses when cash is disbursed (Weygandt & Kieso & Kimmel, 2002, p.89). Utilizing a cash basis system provides the business with greater control over its cash account and up to the minute tracking of the cash position of the firm.

The system is easier to implement due to simplicity and does not have to follow the generally accepted accounting principles (GAAP). Since cash basis accounting is not in accordance with GAAP this implies that a person that is not an accountant or has any type of accounting training run such a system. A small business owner who can not afford the services of an accountant may be persuaded to run his numbers based on a cash basis system since he can do all the accounting work himself. A good example of a business that is likely to utilize a cash basis accounting system is the owner of a hot dog stand.

This individual has a one person operation in which the business is constantly dealing with small cash transactions. The person on a weekly basis performs a materials purchase which is financed with the cash collection of the week. Both the revenues and expense accounts of the business owner are dominated by cash transactions. A cash basis accounting system has its advantages but also imposes a variety of problems. If a company utilizes such a system at the end of the accounting cycle the financial statements that are prepared will lead to misleading information.

The reason that the financial statements have misleading information is that the system fails to record revenues that has been earned, but not yet received. Other problems arise from the fact that expenses may not match