Basis of Accounting – Know your Reports is the 7th blog in our Reading Financial Statements Series ©
Basis of Accounting – Know your Reports
Question:
If three different accountants/bookkeepers sat down with the same data and transactions to process, would they prepare financial statements that look exactly the same?
Answer:
Possibly but probably not.
Reason:
Assuming each accountant is accurate and consistent, each may not account for transactions or activity in the same way. They may also set up their reports differently.
Assessment billing and receipts example:
Assume assessments of $100 per homeowner are billed to 50 homeowners on the first of November. Forty owners pay in full on the first of the month, ten owners don’t pay until after the end of the month. How does basis of accounting represent the results of the transactions?
Cash basis
Records only cash received. Assessment revenue recorded and presented in the income statement totals $4,000 (40 owners X $100). A receivable is not presented on a cash basis balance sheet.
Accrual basis
Records activity regardless of cash collection status. Assessment revenue recorded and presented in the income statement totals $5,000 (50 owners X $100). A receivable of $1,000 (10 owners X $100) is recorded on the balance sheet.
Expense example:
Assume landscape invoices for November totaling $2,000 are received from the vendor and paid in early December. What is the difference between cash and accrual accounting for November’s landscape expense?
Cash basis
Using the cash basis, the accountant will record the $2,000 landscape expense in the month the check is cut and sent to the vendor. The expense will be recorded in December instead of November.
Accrual basis
Under the accrual basis, the bookkeeper will account for the $2,000 November landscape invoice in November by accruing the expense in accounts payable.
November income statement comparison using both examples:
| Cash Basis | Accrual Basis | |
| Assessments Revenue | $ 4,000 | $ 5,000 |
| Landscape Expense | $ – | $ (2,000) |
| Excess Income | $ 4,000 | $ 3,000 |
You can clearly see the different results presents under the cash and accrual bases of accounting. Know how your financials are presented so you can continue to make great decisions.
Full Accounting and Knowledge
We believe the full accrual basis of accounting provides associations and readers of financial statements with a more complete and accurate representation.
