Full Accrual, Modified Accrual and Cash Budget Introduction Cash budgeting is the simplest accounting method as it resembles having a chequebook (Weygandt et al. , 2010). Cash is usually recorded when it is put into the bank while expenses are on the other hand recorded when a cheque is drawn to pay a bill without reflection of uncollected assessments or unpaid bills. According to Black (2008), cash accounting considers the firm’s cash flows without upholding the matching principle. Expenses and revenues are recognized when cash changes hands and not when it is actually earned or during the period of benefit.
When there are significant cash on hand amounts, it is possible to purchase goods whose future payments will be pending or offer credit to its customers without being concerned about excess. Within the cash method, it therefore becomes possible to defer taxable incomes through the delay of billing or acceleration of expenses through swift making of payments. Cash accounting is mostly used where firms get advance payments and have to pay up for their inventories during the time of their delivery.
In such circumstances, cash accounting works best and offers adequate details that will enable the accurate keeping of records. For example, a tanning salon usually offers its services to members of the public who pay in advance. The expenses it incurs include the purchase of tanning oil which it buys in cash and also various utilities which are also due when bills are received. Cash accounting will work best for the salon because all its financial outlays and incomes already take the form of cash payments (Needles et al. , 2011).
According to Clare (1994), full Accrual Accounting differs from cash accounting. This is because rather than tracking cash flow, it tracks transactions. All incomes are recorded at the time when they are earned while the expenses are on their part recorded when they are incurred. For instance, income will be recorded when a company bills its owners and not when the time when the funds are actually received. This also happens to expenses. If the management approves a supply contract worth $100,000, the expense will be posted even if the money might not be moved out of the bank for a long while afterwards. In accrual accounting, the main objective is to achieve an accurate reporting of income for every accounting period irrespective of the duration, for instance annual, monthly or quarterly.
This objective is attained in two main ways. The first is recognition of revenue at its point of earning, for instance the delivery of products finishing of service work irrespective of the cash exchange’s timing. It further records the revenues during the same times as the associated expenses which were paid for in revenue generation.
The main overriding principle in full accrual accounting is the matching principle in which expenses are documented during the same time when revenues related to them are recognized (Rosen, 2005). Black (2008) explains that modified accrual accounting on its part is a mixture of the accrual and cash methods. Firms which use modified accrual will for instance record every assessment when it is due, but at the same time record its expenses only when paid. It is also referred to as expenditure basis accounting.
It recognizes events and transactions when they occur, and does not consider the time when cash is received or paid. In its case however, no costs that might be consumed later on are deferred. Physical assets that can offer service in future end up being written off during the period when they were acquired.