ACCRUAL & CASH-BASIS SYSTEMS

ACCRUAL AND CASH-BASIS SYSTEMS

The business enterprises may keep their account books (i.e. may records their business transactions) in one of the two ways.

ACCRUAL SYSTEM of accounting means that expenses and revenues are recognized in the period they occur, regardless of whether a cash transaction has occurred or not (i.e. payment has been made or not, amount has been received or not). This method matches revenues of the period with the expenses of the same period.

CASH BASIS SYSTEM of accounting means that revenues are recorded only when amounts have been received and expenses are recorded when payments are made. Under this method, revenues and expenses of the same period may not match.

Generally Accepted Accounting Principles (GAAP) requires that all the public companies (business enterprises) have to use Accrual System of Accounting.