Cash vs.

accruals accounting
The diagram below illustrates the two different methods of accounting and
how this affects financial reports. It describes the ordering and purchasing of a
(low value) laptop computer and the stages in the process:

• 1
A Purchase Order is authorized and sent to the vendor on 10 March. A
Purchase Order is a legally-binding document that commits the purchaser to
buying the goods or service specified. The organization should record this on a
schedule of purchase orders raised so it can be monitored. (In practice, this is
the point at which the budgeted funds are allocated for use.)
• 2
The laptop is received on the 17 March. This is the date when the item is
received - and the 'benefit' of the transaction technically commences. (There
should be a signed Goods Delivery Note or similar supporting document as
evidence.)
• 3
The invoice is issued on 28 March. This is the supplier's formal request for
payment and the 'official' supporting document that defines the transaction
date for tax purposes. (There is usually a requirement to settle the bill within 30
days.) Most organizations using accruals accounting, record the transaction
on this date, recognizing the expense, as well as the amount due to the
supplier.
• 4
The invoice is paid on 14 April. This is when the payment transaction is made
to the vendor for the laptop received in March.
The accounting process to record the purchase of the laptop computer is
different for each accounting method, as follows:
• Accruals method - the transaction is recorded as March activity
because that is when the goods and invoice were received,
formally triggering the financial transaction. As the invoice is dated
28 March, the expenditure will be recorded in the accounting
records on that date. This means that the cost of the laptop
computer will appear in the March expenditure report.
• Cash method - the transaction is recorded as an April activity
because that is when the invoice was actually paid. The transaction
date is recorded in the accounting records as 14 April, the date the
cash payment was made. This means that the cost of the laptop
computer will appear in the April financial reports, it will not be
recognized as a March expense even though the 'benefit' of the
computer actually started in March.