Cruel or accrual
But suppose that no money
changed hands in those transactions.
The property owner acknowledged an obligation
to pay, and committed to pay within a certain
time. The business owns this right to
receive money, which (assuming the customer
will pay) is just as real an asset as money
in the bank. Money is not received, but
the “account receivable” is, and the
total assets are increased. ACCRUAL
BASIS ACCOUNTING recognizes the income at
this time. XE
"accrual method:definition" Value
has been created by the company doing its
line of business. Corresponding to the
increase in value is an increase in ownership
or equity, and that increase in equity is
income.
Later the customer pays,
and cash is received. But at that time,
when the cash comes in, the accrual method
counts no income. It is simply a
matter of trading one asset for
another. The accounts receivable item
is no longer there, but the cash is.
With this payment transaction, there is
neither income nor expense, and the bottom
line is not changed.
Likewise for the fuel and
disposal service. Assuming (again,
for illustration) that the gardener could get
credit at the land fill, he would pay out no
cash. The company would assume
obligations to pay for the fuel and the waste
disposal, by dates certain. The
liabilities are increased, and the net worth
decreased, exactly as if cash had gone
out. Accrual basis accounting records
this event as an expense.
When these bills are paid,
the results are similar to receiving
payment: the bottom line does not
change at this time. Cash is gone, but
so are the liabilities, and net worth
(equity) is not changed.
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