There are two methods of accounting:

Cash accounting: records transactions only when cash is exchanged

This method is not typically acceptable

Accrual accounting: records transactions based on the economic substance, based on two factors:

     1.Whether the event is likely to occur (probable); and

2. If the amount can be estimated (reliably measured).    

Qs: Do you know what they are?

Cash accounting – records transactions only when cash is exchanged

-Every transaction recorded by the company will have one debit or one credit that includes cash. So when you receive cash from a customer you would record revenue and when you disburse cash to a vendor you will record an expense

-Typically not acceptable

Accrual accounting – records transactions based on the economic substance of the transaction

-Using the two criteria we discussed in yesterday’s module

Qs: Can you recall what the two criteria to record a transaction are?

-Probable: Is the event likely to occur?

-Reliably measured: can the amount be estimated?

Under cash accounting, cash is the trigger for each transaction. This makes the process of identifying and recording transactions easier.

Under accrual accounting, a cash movement is not necessary to trigger a transaction

We must look at the economic substance to determine if a transaction has occurred