The main point of difference between accrual accounting and cash accounting is the time when expenditure and income are recognized in the organization. The accrual accounting basis recognizes revenue when earned and expenses when incurred (Scott, McKinnon & Harrison, 2003). Cash accounting, on the other hand, recognizes revenue when money is received and expenses when paid out. Whereas cash accounting is appropriate for small organizations like sole proprietors that do not keep inventory, accrual accounting is appropriate for large organizations as it permits the current cash inflows/outflows to be consolidated with future expected cash inflows/outflows to give a more precise picture of a company’s current financial situation (Scott, McKinnon & Harrison, 2003).
The cash at hand item is used daily in an organization. This is because some of the company’s sales are made in cash and some expenses are also paid out in cash. The cash at hand item should, therefore, appear in the current assets category in the balance sheet since unlike the fixed assets, it requires to be adjusted regularly. Cash flows both have a positive or negative effect on an organization depending on how they are changing. Poor cash flows may make an organization make late payments of its expenses which may affect the organization’s ability to access loans in the future as its credibility may be compromised (Zelman, McCue & Glick, 2009).
It may also result in the company’s investors failing to receive their return on investment, and the company may be forced to obtain loans to provide finances for its day to day operations or to pay its expense. However, if the cash flows are efficient, the organization’s growth will be at a high rate regarding its investment in machinery and buildings (Zelman, McCue & Glick, 2009). The company can also hire more employees and consultants who offer expertise in the various activities carried out in the organization. An organization is also able to increase the number of investors since it’s able to pay its dividends.
- Scott, J. E., McKinnon, J. L., & Harrison, G. L. (2003). Cash to accrual and cash to accrual: A case study of financial reporting in two NSW hospitals 1857 to post-1975. Accounting, Auditing & Accountability Journal, 16(1), 104-140.
- Zelman, W., McCue, M. & Glick, N. (2009). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications (3rd ed.). Hoboken, NJ: Jossey-Bass.