Commercial Accounting Principles
In commercial accounting, two types of accounting principles are generally prescribed to track financial transactions. The two are cash-basis and accrual accounting. Both have positive and negative aspects, but depending on the transaction, an owner determines which method is more effective.
With cash-basis accounting transactions, all transactions are recorded in the ledger when cash actually changes hands. This occurs when the business receives cash payment from the customer, or when the business pays out money for services or purchases. Cash receipts and payments can be paid by cash, credit card, checks, or electronic transfer. Cash-basis cannot be used if a business sells products or services on store credit and bills the customer later. It is not necessary to record and monitor the money from customers for future billings(Nolo Legal Encyclopedia, 2013) .
With cash-basis transactions, the owner only records the purchase of goods or supplies that will later be will be sold when cash is paid out. If the owner purchases goods on credit to be paid at a later date, the owner does not record the transaction unit the cash is paid.
In accrual accounting, all transactions are recorded in the ledger when they transpire, even if the cash does not change hands. An example is when a business sells goods or services on store credit. The transaction is recorded simultaneously, and entered into the accounts receivable account until payment has been received. If goods are bought on credit, the transaction is entered in the accounts payable account until cash is paid out. The general rule of thumb for using the accrual method is, if your business has sales or services that bring in more than $5 million a year. Another factor is if your business stocks inventory or merchandise that will be sold to the public, and reflects receipts of more than a million per year (Nolo Legal Encyclopedia, 2013).
Accrual accounting does have some negative aspects. It is effective in matching expenses and revenues, but is less effective in…