I need to fix this case my professor said that I copy too much from the internet I need to explain it in other words can somebody fix it and add some more to what i have.
MEMORANDUM TO: MR. KENNETH DONALDSON FROM: SUBJECT: ACCRUAL BASIS VS CASH BASIS DATE: SEPTEMBER 15, 2014 CC: This memo will serve as a way to explain what accrual basis and cost basis is, and with that the differences between the two. As well as what the realization and matching principle are and how it relates to Mr. Donaldson. Also, this memo will give advice to Mr. Kenneth Donaldson about how he will benefit to prepare financial statements on accrual basis versus cash basis. Using accrual basis methods will show more revenue than using cash basis. Accrual basis accounting, revenue is reported in the fiscal period it is earned, regardless of when it is received, and expenses are deducted in the fiscal period they are incurred, whether they are paid or not. You record both revenues and expenses when they occur. The cash method or cash basis is usually used for accounting in small business. Under the cash method, income is not counted until cash is received, and expenses are not counted until they are paid. (Fishman) The difference between the two types of accounting is when revenues and expenses are recorded. In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually paid. Accrual basis accounting is the method of accounting most businesses and professionals are required to use by law. Most small businesses choose cash method because they have sales of less than $5 million per year and they are free to adopt either accounting method accrual or cash. But when your business has sales of more than $5 million per year. You must use the accrual method. Either method you use, it's very important to understand that either one gives you only a partial picture of the financial status of your business. (Fishman)(Ward) The recognition of revenue and gains of an entity during a period involves consideration of the following two factors. First being realized. Revenue and gains generally are not recognized until realized and second being earned, states that revenue is not recognized until earned. The realization and matching principles are two such guidelines that solve accounting issues regarding the measurement and presentation of a business's financial performance. The matching principle requires that expenses incurred to produce revenue must be deducted from revenue earned in an accounting period to derive net income. (Nordmeyer)(FASBASC605-10-25) Mr. Donaldson please check the above figures than you can conclude that net income more in accrual basis Here is some Benefits of Accrual Accounting 1. A Better Picture of Financial Performance 2. Tracking Historical Trends 3. Access to Credit 4. Meeting GAAP 5. Allows Financial Managers to Better Use Company Resources Computation of the both Methods of Cash basis and Accrual Basis Cash basis 2 Operating Cash Flow Particulars Year 1 Cash collected Year 2 $ 160,000 $190,000 Cash disbursements: Salaries $ 90,000 Utilities $ 100,000 $ 30,000 $ 40,000 Purchase of insurance policy $ 60,000 $ 0 Net operating cash flow $ -20,000 $ 50,000 Accrual Basis Particulars Year 1 Year 2 Revenues $170,000 $ 220,000 Salaries $90,000 $100,000 Utilities $35,000 $35,000 Insurance $20,000 $20,000 Expenses: Net Income $25,000 $65,000 To conclude the above figures the best method of reporting financial statements are is accrual basis method why because the net income both years are more than cash basis. As per accounting standards also the accrual accounting is the best way to report the financials. 3 Citations (1)Fishman, Stephen. "Cash vs. Accrual Accounting | Nolo.com." Nolo.com. Nolo, 2014. Web. 13 Sept. 2014. (2) Ward, Susan. "The Difference between Accrual and Cash Basis Accounting." About Money. About, 2014. Web. 13 Sept. 2014. (3)Nordmeyer, Billie. "Realization & Matching Principles of Accounting." EHow. Demand Media, 21 Sept. 2011. Web. 13 Sept. 2014. 4
