Accounting Methods (Part 2)

Further to a previous Communiqué in which cash-based accounting was discussed, Capital Corp Merchant Banking will now discuss a second popular method: accrual-based accounting.

The primary difference between the two is that revenue in an accrual-based system would be recognized once it is earned and realizable; unlike cash-based, in which revenue is recognized only when cash is received.  

Expense recognition in accrual-based accounting follows the same logic, wherein an expense is recognized during the period in which related revenue is also recognized.  This is known as the matching principal.

Despite certain rules of revenue recognition in accrual-based accounting, there is still some room for management discretion being that revenue is recognized before any cash is actually received by the company.   It is important to have a full understanding of how revenue is recognized by a company - especially the amount it does not expect to collect, i.e. its bad debt expense.

For more information about Capital Corp Merchant Banking, kindly review our website at http://www.capitalcorpmerchantbanking.com.

Respectfully,

Capital Corp Merchant Banking, Inc.