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Both the cash accounting and accrual accounting methods have similarities in outline, which are related to the recording dates of the company’s financial statements. Meanwhile, the difference between the two accounting methods in a broad scope is the timing of recording financial statements. However, the accuracy of the application of the two methods will affect the practice of bookkeeping in your company.
In a way that is simple and easy to apply, cash accounting methods are widely applied by several small and medium business owners. This is because the bookkeeping process is simple so that to track money in and out of a bank account is quite easy, because it is not mixed by recording accounts receivable debt. Unfortunately the cash accounting method has the disadvantage of producing an inaccurate picture of your finances. Because, all income and expenses can not be calculated. That is, you cannot calculate cash flow in the next month, even this month.
Basically accrual accounting has the opposite principle of the cash accounting method. Earnings and expenses are recorded when they are billed and earned, regardless of when the money was actually received in physical form. This method can provide a clearer financial perspective and is often used by middle and upper companies because it has a more ordered financial systematics.
The advantage of using this accrual accounting method is that it helps small business owners develop their business in a more realistic direction. Through the accrual accounting method, you can find out about the company’s income and expenses for a certain period of time. If this method is successfully implemented in your company, then an overall picture of how your business and future direction can be taken into account.
Although this accrual accounting method is so complex, there are still some weaknesses, one of which is not taking into account the cash flow or funds available in your bank account. If you are not careful in keeping bookkeeping practices, this accrual based accounting method can be financially detrimental for small business owners.
The cash accounting method is easier to use because the operation is very simple. However, some expenses such as debt cannot be recorded in this method, only limited to income transactions and expenditures in physical form that have been received. Meanwhile, the accrual accounting method has a more complex system in recording your company’s finances.
The cash accounting method gives a better nuance to the funds in your bank account. While the accrual accounting method does not calculate cash flows that enter through your bank account, in other words this method accounts for money that has not yet been entered. The cash basis gives you a direct view of your financial picture, while the accrual basis is more a long-term view.
Cash flows from investing activities are cash flows in the form of income or expenses. Generally, this cash flow that affects investment in non-current assets is cash flow from investment activities. These investment activities are those related to the sale or purchase of company assets. Examples such as, transactions that involve the sale and purchase of fixed assets such as equipment and buildings.
Usually the cash flow from this funding activity comes from transactions that affect the company’s debt and equity. This is generally, transactions that include the issuance or termination of equity and debt securities. Examples are bond sales, dividend payments, stock issuance, and repayment of credit from banks.