Cash and Accrued Accounting Methods

Posted: July 13th, 2021

Cash and Accrued Accounting Methods

Cash accounting involves recognizing the revenues and expenses immediately the payment occurs while accrued accounting involves recognizing the revenues and expenses immediately billing occurs even though actual payment is not yet done. When differentiating the income between the two accounting methods, cash accounting involves cash collecting and payments while accrued accounting recognizes the income immediately the billing occurs but does not require cash collecting or any payments (Asma Salman, 2018). For instance, Levitt Partners ACO rendered psychiatrist services to three clients on February 25, 2019, but the payments were made on April 25, 2019, three months later. Using cash basis accounting this would record a very huge loss in the income statement as the delayed payment hence an expense. However, using the accrued accounting method would record the earning on February 25, 2019, the day the service was offered.

The positive effects of using cash accounting in these HCOs such as the American Healthcare Association and the Levitt Partners ACO is that it is easy to record and manage the finances. Direct service providence and cash payment make it easy to manage the finances, thus simplified cash flow. On the other hand, accrual accounting makes it easy to balance and match the HCO’s expenses and revenues on a long-term basis in their balance sheet. This enables the HCOs to analyze and manage their finances (Asma Salman, 2018). In another instance, in a situation where the AHA receives an electricity bill for last month on August 5, 2019, but pays the bill this month today. The expense is recorded in July, as this was the time the expense was received. However, the payment occurred the following month.

When discussing the effects of the decisions on revenue recognition and matching principles, the accrued accounting method possesses better matching and recognition of expenses and revenues. The revenue recognition principle states that revenue or an expense is recorded when earned and not paid. This best conforms to the accrued method. On the other hand, revenue-matching best occurs when accrued accounting is conducted. This is because; it enables easier and better balancing of the HCO’s gross revenue and expenses (Asma Salman, 2018). This enables the HCOs to record their net revenues in the income statements correctly.

Reference

Asma Salman, M. G. (2018). Accounting from a Cross-Cultural Perspective. Croatia: Intechopen Limited.