Cash Vs Accrual Methods
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Submitted by cmacadams on 04/14/2009 11:11 PM Flag This Paper
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Cash Vs Accrual Methods
Introduction
American Physical and Social Programs for Children, Inc. is a "sports-oriented school year and summer camp program for children" (Abdolmohammadi and McQuade, 2002; p. 247) owned by two child psychologists. The owners need to decide whether to use the cash or accrual method of accounting. Another issue to discuss is the owners' choice to use June 30 as the end of its fiscal year.
Cash vs Accrual Methods
In the cash method of accounting, revenues are recorded when they are received and expenses are recorded when they are paid. The cash method provides an overview of total revenues and total expenses, but does not make distinction of the balance between them. One of the perennial struggles of many small businesses is that of cash flow, and the cash method does not positively contribute to understanding and managing the business' cash needs throughout the year.
In contrast, the accrual method of accounting records revenues when they are earned and expenses when they are incurred. For this company, this approach would more useful because of the method of the company's operation. School-year programs "run from mid-September to mid-June for 10-week periods" (Abdolmohammadi and McQuade, 2002; p. 248), and parents prepay for each session. The summer camp programs run between the last week of June and the last week of August, and parents also prepay for those. In each case, the business collects the revenue that the programs generate well in advance of paying the expenses of each program.
If using the cash method, the business will show healthy revenues in June with minimal expenses, and then post virtually no revenues until the end of August or the first of September, in advance of the beginning of the first of the 10-week programs of the school year. If using the accrual method, however, the business will post revenues earlier but also will record program expenses when they become obligations rather than when they become reality. As example, the...