January 18, 2018
As any textbook on accounting methods will tell you, there are two main methods by which companies record their financial transactions in their books. They call one cash-basis accounting, and they call the other accrual accounting.
If anyone asks you what the difference between the two accounting methods is, the most important one is this – they record cash flow differently, as James Smith from James Milne Accounting. explains. The simple differences in the way in which these two accounting methods deal with cash flow can open the way to a lot of manipulation. You’ve heard a lot about Enron and how they cooked their books, haven’t you? A lot of that happened because they try to pull the wool over their auditors eyes do with which one of the, the methods they were using.
A company that uses cash basis accounting, when expenses occur, will record them only when the cash is actually spent. They will only record money coming in when the monies actually come in and it’s sitting at their bank accounts. So if the companies finished a project today but they won’t get paid for it until the following month because they extend …