Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
Chapter 21
Chapter 22
Chapter 23
Chapter 24
Chapter 25
Chapter 26
Chapter 27
Chapter 28

Chapter 2

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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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Last modified: May 21, 2004