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Cash vs Accrual basis

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Transcript

Okay, welcome back. And in this lecture we're going to be talking about the cash versus accrual basis of accounting. Now, there are two different kinds of systems. And they actually determine how and when you record transactions. So I'll illustrate this by first talking about the cash basis of accounting. So let's say for example, you open a market down the road.

And every time you sell a piece of fruit for example, you receive cash for you make another transaction, you receive some more cash, you make another transaction will cash another transaction and will cash and at the end of the day, you count how much you sold and you can't put the money that's in your till and that is how you record the transactions for the day. Everything is done on the basis of When the actual cash got transacted, and that is the case, but the cash basis of accounting, this is the basis, it's been around for hundreds if not thousands of years. However, in more recent times, we've now moved to a system called the accrual system. Now illustrate this by looking first at the revenue side of accruals. Now, the accrual basis of accounting works by classify things when the revenue has actually been earned and when costs have been incurred.

So let's start with revenue. When revenue has been earned, let's say for example, you've got a business and you're delivering some of these items to customer. You don't actually get paid for the actual goods that you just delivered. However, you give your customer an invoice. Then, a few days later, or if not a couple of weeks later, you get the cash for the actual invoice that you actually deliver the goods and there's actually a timing delay between when you actually perform the service or deliver those goods as opposed to when you got paid. However, the whole basis of accrual system is that you actually record the revenue when the goods were actually delivered, or when the service was actually performed.

And there's gonna be a timing issue between when you actually get paid. Let's now look at the cost basis. Again, it's based on the same concept. So the only difference in the terminology is that it's determined when the cost has actually been incurred. So now let's say for example, you've got a business and you've got staff members, and you actually have to pay them for the time that she worked in your business, and that's determined based on the time it's based on the resources that you have. And it's also determined when an asset is being consumed.

These are the three kind of situations which would result in cost being incurred. So these employees that are working for you, clock in clock out, they do a day's work. Now they get paid the following week. So for example, now let's say for example, that this actually occurred over a period of time between two different months. And so some of those days that actually worked related to last month, and some of the days relate to the current month, when that she got paid. On the cruel basis of accounting, however, there is still a time delay between when you actually incurred the cost and when the when the cost was actually paid for however, you will actually record this cost in the actual period in which the costs had actually been incurred.

So in this example, where these employees had worked, and some of the days full last month, and some of the dates fold in the current month, you would still need to accrue the costs for the time that she worked in the previous month. So hope you get the whole concept between the difference between cash and accrual basis of accounting. It's very much comes back to when we talked about the period concept and understanding the different time periods that actually occurred and looking at when those costs have actually been incurred, and when those revenues have been earned. Okay, so in the next lecture, we're going to be looking at the actual accounting equation. See you then

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