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Accounting refers to financial information management. Accounting informs origin for the funds, methods to apply them, and the outcomes achieved. There are two primary accounting methods used in financial reporting economics and taxes - accrual basis and cash basis.

Accrual basis of accounting is a method of accounting when income is reported when earned and the expenses are reported when incurred. According to this method, it is upon the company’s decision when to recognize the income or the expenses. A company ought to evaluate the earnings that are registered, even if not actually received. In other words, economic events within the company are recognized regardless of the time when factual cash transactions take place. This is the standard accounting technique for most companies because the method allows to describe a more accurate picture of what the current economic status is like.

On the contrary, in cash basis, accounting income is reported when received and expenses - when paid. Thus, only when cash is received, the revenue is recognized.

The key difference between the methods lies in the financial events’ reflection. For example, a customer buys a laptop. Supposing a company sells the devise on a 12-months credit. Therefore, the laptop is sold, but actual sum of money will be received later. A company experiencing the accrual basis and a company with the cash basis will see the same event differently. In the first case, the product sale is recognized as soon as the customer takes his ownership over the laptop, for the supplier will very probably receive the cash in a year. The payment is not in the bank yet, but the selling is booked and the company’s revenue increases. In the second case, however, the revenue is to be recognized only in December 2013. Hence, these are the opposite methods of accounting.

Economic Cycle Wells Fargo Bank
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