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  #1  
Old 05-14-2004, 09:04 PM
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Cash accounting VS accrural accounting

What is the difference between these two types of accounting and what are the pro's & cons of each if you were to have a retail operation?

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  #2  
Old 05-14-2004, 10:28 PM
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OK, If I remember my managerial accounting classes from college here is the difference:

Cash Accounting is that you report income as per your invoices. In other words, you assume (even though you give credit to customers) that you report it as income even though you did not receive the cash within that month or period.

Accrual Accounting is that you report income as you receive the actual payment (also when giving credit to customers). In other words, your income for the month or period is not based on what you invoiced rather than, it is based on what you actually received as payments, even though the payment received this month was for an invoice from the previous month.

Now the pro´s and con´s. First off, legally you need to define at the beginning of the fiscal period which type of accounting method you are going to use and you ahve to stick with throughout the period. i.e. Uncle Sam - for income tax period.

Another way to explain a pro or con is that most Doctors and Attorney use the accrual accounting method since many clients can easily not pay for services rendered. Therefore, these professionals prefer to use the accrual method to only report for income reasons what they actually received payment for rather than what they billed/invoiced out for.

As for a retail operation, I would probably use the cash method since you will not be billing out as much, if at all, like lawyers and doctors. It is a little easier to administrate.

Iggy
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Insanity: doing the same thing over and over again and expecting different results.

2006 - Suzuki Gran Vitara (2.0 L fully equipped) Like this car so far except for trying to put on the seatbelt.
1988 - 190e - 2.3L - 172K miles (It now belongs to the exwife)
1999 - Chevy Blazer LS Fully Equiped - killed it June 2006
2001 - Honda Civic EX - 68K miles (sold June 2004)
1963 - 220S - Dual Carb 6 cyl. (sold)
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  #3  
Old 05-14-2004, 10:42 PM
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Quote:
Originally posted by euronatura
Cash Accounting is that you report income as per your invoices. In other words, you assume (even though you give credit to customers) that you report it as income even though you did not receive the cash within that month or period.

Accrual Accounting is that you report income as you receive the actual payment (also when giving credit to customers). In other words, your income for the month or period is not based on what you invoiced rather than, it is based on what you actually received as payments, even though the payment received this month was for an invoice from the previous month.
Iggy
Other way around. Cash basis records transactions (of any kind) when the cash is received, accrual assigns a transaction to the period it occurs, whether or not cash is received at that time.

Simple explanation:

http://dese.mo.gov/divadm/finance/newadmin/Concepts.pdf
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Old 05-14-2004, 10:49 PM
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oppsss. Got it backwards...........
For the past 4 years I have been looking and analyzing income statements in spanish and in a country where everyone manages two books. Fiscal Books and then the real Financial Accounting Books since many of the local laws pertaining to accounting are outdated.

Iggy
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Insanity: doing the same thing over and over again and expecting different results.

2006 - Suzuki Gran Vitara (2.0 L fully equipped) Like this car so far except for trying to put on the seatbelt.
1988 - 190e - 2.3L - 172K miles (It now belongs to the exwife)
1999 - Chevy Blazer LS Fully Equiped - killed it June 2006
2001 - Honda Civic EX - 68K miles (sold June 2004)
1963 - 220S - Dual Carb 6 cyl. (sold)
1994 - Yamaha WaveRaider (fun to ride)
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  #5  
Old 05-15-2004, 10:42 AM
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accrual accounting

If you retail sales business will have inventory you will be required to use accrual. It will also give you a much more acuate picture of what your business is doing. While cash flow is important the biggest mistake most new business owners' make is to manage their business based upon what is in their checking acc't, rather than by their profit. Dairel
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Old 05-15-2004, 11:25 AM
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Quote:
Originally posted by euronatura
oppsss. Got it backwards...........
For the past 4 years I have been looking and analyzing income statements in spanish and in a country where everyone manages two books. Fiscal Books and then the real Financial Accounting Books since many of the local laws pertaining to accounting are outdated.

Iggy
Iggy! Is that legal? From which set of books are taxes figured?

B
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  #7  
Old 05-17-2004, 03:13 PM
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Botnst

Sorry it took me so long to reply. I have had problems with the internet connection here at the house for hte past few days. To answer your questions - Yes it is legal because taxes are figured from the fiscal books. The financial books are "internal" and basically those are the ones that we use to measure true profitability.

For example one of the differences is the following. Here in Guatemala employees are paid 15 salaries a year. The normal 12 month salary plus:

"aguinaldo" which is the xmas bonus (equivialent to one months pay) paid in december.
"bono 14" the 14th salary (also equivalent to one months pay) paid in July.
"indeminizacion" (it is a sort of unemployment insurance since the government offers none and it is thrown on the private industry´s shoulders to bear this burden) which is an extra month pay for each year that you worked for the company, only that this is paid out at the time that you leave the company.

Now it is this "indeminizacion" that on your fiscal books that you can not book the account payable on a monthly or yearly basis to catagorize as a salary expense therefore decreasing your profitability to reduce taxes. You can only take this expense as a true expense at the time that you actually pay out. So even though you have an employee that worked for you for 8 years and he is due 8 months pay at the time that he leaves, you can not take this as a fiscal expense until you actually pay it out.

Given this type of tax laws, many companies, at least the most that I have worked with. also have internal financial statements that represent their true profitablity that take these type of expenses into account during the period that they are actually incurred and not at the time that they are paid out.

Now do not get me wrong, in the fiscal books you can book the account payable for this but you can not write off the expense to represent a lower net income (boefore taxes), therefore less taxable base, unt¡l you actually pay it out. In other words, you can create under the salaries part of your fiscal book an increasing (as long as you do not let go of personnel) amount of salaries due but that salaries due is not expendable until you pay it out.

I hope that I made sense, I have had a few beers this afternoon with the guys.

Iggy
__________________
Insanity: doing the same thing over and over again and expecting different results.

2006 - Suzuki Gran Vitara (2.0 L fully equipped) Like this car so far except for trying to put on the seatbelt.
1988 - 190e - 2.3L - 172K miles (It now belongs to the exwife)
1999 - Chevy Blazer LS Fully Equiped - killed it June 2006
2001 - Honda Civic EX - 68K miles (sold June 2004)
1963 - 220S - Dual Carb 6 cyl. (sold)
1994 - Yamaha WaveRaider (fun to ride)
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  #8  
Old 05-17-2004, 09:45 PM
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The discussion (so far) has missed the other side of accrual accounting: Expenses.

In cash accounting, expenses are realized when they are paid. In accrual accounting, expenses are recognzed in the period they are incurred---regardless of when they are paid.

In a nutshell, Income and Expenses are recognized in the period that they are actually earned or incurred---regardless of when the money is collected or paid out. Accrual accountings is accomplished by a series of adjustments to income and expenses. This results in the ability to abilty to produce an Income Statement for a period---in which income and expenses are accurately compared to one another, and the difference is either a profit or a loss.

Assets and liabilities are also adjusted so they accurately reflect a fair representation of a particular point in time.

Accountants understand the principles and implimentation of all of these and other "adjustments". That is a large part of what they do with their pencils while peering beneath green eye-shades. Just kidding--they do it with computers these days.

The "trouble" with Cash Accounting is that it is very difficullt to gauge whether there is a real profit or loss---and the extent of it. It is also harder to gauge what the business is worth at a particular point in time. You are "flying blind" in a sense.

------

Time to fess up: I used to be an accountant in a former life... ho hum. Yawn.
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1977 Mercedes 240D. 4-speed transmission. Windows, A/C, and sunroof: all manual. Medium Red. 204K miles.
1988 Subaru GL wagon. Dual range 5-speed 4X4. Daily driver w/ twin parts car.
1994 Subaru Loyale wagon. 5-speed 4x4
1966 International 3/4 ton 4X4 truck. Ooh yeah!
1952 Ferguson TO-35 farm tractor.
1984 Snapper rear engine riding mower. Just like Forest Gump.
1988 Nimble 20 sail boat
--Older stuff is built better--
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  #9  
Old 05-17-2004, 10:00 PM
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morgantruce

You are correct in your discussion. Now, I hate to ask, since you really do not fess upto it freely in being a former accountant. Could you have been from the other side? IRS? It seems that you know the pitfalls of the different accounting systems and know where to cut the juglular!!!!

Iggy
__________________
Insanity: doing the same thing over and over again and expecting different results.

2006 - Suzuki Gran Vitara (2.0 L fully equipped) Like this car so far except for trying to put on the seatbelt.
1988 - 190e - 2.3L - 172K miles (It now belongs to the exwife)
1999 - Chevy Blazer LS Fully Equiped - killed it June 2006
2001 - Honda Civic EX - 68K miles (sold June 2004)
1963 - 220S - Dual Carb 6 cyl. (sold)
1994 - Yamaha WaveRaider (fun to ride)
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  #10  
Old 05-17-2004, 10:27 PM
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The IRS (and the FBI) tried recuiting me many times----a very good indication of the serious trouble within both of those organizations.
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  #11  
Old 05-18-2004, 05:12 PM
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I didn't get a yen to go sailing for a number of years. One day I realized that the little spring that supplies our house, flows into a small stream, which flows into a larger stream which flows into the Ohio River, which...

Very soon I launched into the river and sailed down to the Florida Keys and up to the Chesapeake Bay. 3000 miles in 13 months.
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1977 Mercedes 240D. 4-speed transmission. Windows, A/C, and sunroof: all manual. Medium Red. 204K miles.
1988 Subaru GL wagon. Dual range 5-speed 4X4. Daily driver w/ twin parts car.
1994 Subaru Loyale wagon. 5-speed 4x4
1966 International 3/4 ton 4X4 truck. Ooh yeah!
1952 Ferguson TO-35 farm tractor.
1984 Snapper rear engine riding mower. Just like Forest Gump.
1988 Nimble 20 sail boat
--Older stuff is built better--
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  #12  
Old 05-18-2004, 08:58 PM
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Quote:
Originally posted by narwhal
'Truce, where does one launch a yawl in W.Va.?
Whal, whar ahm frum, yuh start wiff a howdy.

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