Accrual vs Cash Basis Accounting

Accrual vs Cash Basis Accounting
Accrual vs Cash Basis Accounting
Submit written responses to these questions.
Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting?
What are the purpose of a journal and a ledger?
Give an example of a contra-asset, and explain how it is recorded on the ledger as a transaction.
Explain what a “prepaid expense” is and how it is recorded on the ledger as a transaction.
What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any?
List and record each transaction for S. Zee Outpatient Clinic under the accrual basis of accounting at December 31, 20X1. then develop a balance sheet as of December 31, 20X1, and a statement of operations for the year ended December 31, 20X1.
The clinic received a $3,000,000 of unrestricted cash contribution from the community. (Hint: this transaction increases the unrestricted net assets account.)
The clinic purchased $2,000,000 of equipment. The clinic paid cash for the equipment.
The clinic borrowed $1,000,000 from the bank a long-term basis,
The clinic purchased $1,500,000 of supplies on credit.
The clinic provided $5,500,000 services on credit.
In the provision of these services, the clinic used $1,000,000 of supplies.
The clinic received $500,000 in advance to care for capacitated patients.
The clinic incurred $2,000,000 in labor expenses and paid cash for them.
The clinic incurred $1,500,000 in general expenses and paid cash for them.
The clinic received $4,500,000 form patients and their third parties in payment of outstanding accounts.
The clinic met $300,000 of its obligation to capacitated patients in Transaction g.
The clinic made a $100,000 cash payment on the long-term loan.
The clinic also made a cash interest payment of $50,000.
A donor made a temporarily restricted donation of $100,000 to be used for operations.
The clinic recognized $200,000 in depreciation for the year.
The clinic recognized $500,000 of patient accounts would not be received.
How do capital structure rations and liquidity rations differ in providing insight into an organization’s ability to pay debt obligations?
Identify and explain two situations where an organization might have increasing activity rations but declining profitability.
Accounting on a cash basis
Revenues are recognized when cash is received, and expenses are recognized when cash is paid, according to the cash basis of accounting.
Accounts receivable and payable are not recognized under this technique.
Because it is simple to maintain, many small businesses choose to adopt the cash basis of accounting.
There is no need to manage receivables or payables, and it is simple to tell when a transaction has occurred (the money is in the bank or out of the bank).
The cash technique is also useful for tracking how much cash the firm has on hand at any particular time; you may check your bank balance to see how much cash you have on hand.
Furthermore, because transactions aren’t documented until cash is received or paid, the income of the business isn’t taxed until it reaches the bank.
Accounting on an accrual basis
Revenues and expenses are recorded when they are earned, regardless of when the money is actually collected or paid, according to accrual accounting.
For example, rather than recording income when you are paid, you would record revenue when a project is completed.
This is a more popular method than the cash method.
The accrual basis has the advantage of providing a more realistic image of income and expenses over time, as opposed to cash accounting, which cannot provide a long-term view of the business.
The disadvantage is that accrual accounting does not provide visibility into cash flow; a company can look to be profitable while actually having empty bank accounts.
Without proper cash flow monitoring, accrual basis accounting can have disastrous implications.
It’s worth noting that many companies keep their books on a cash basis yet file their taxes on an accrual basis.
When it comes to tax preparation, they take the necessary measures to convert cash basis accounting to accrual accounting.