Businesses use both the cash basis and full accrual basis of accounting and budgeting in their operations. U.S. Generally Accepted Accounting Principles require that an organization report its financial statements on a full accrual basis. This can also help to gauge the revenue and expenditures to be anticipated in the coming year. Cash flow is pertinent to liquidity concerns of a company. Without enough cash the business will not be able to pay the bills as they come due.
Cash Basis Accounting
Cash basis accounting recognizes the cash inflows and outflows of a business, without concern for the matching principle. In other words, revenues and expenses are recognized as cash is exchanged, not when earned or in the period they benefit. A cash budget is usually used to estimate the liquidity of a business. A fair amount of cash on hand will allow a company to extend credit to customers or make purchases for which future payments will be due, without excess concern.
Full Accrual Basis Accounting
U.S. Generally Accepted Accounting Principles (GAAP) require that all financial information be reported on a full accrual basis. This means revenue is reported when earned, not when cash is paid. Expenses must then be matched to the period in which they helped to earn the revenue. For example, wages and salaries are reported when the employee works, not when they are paid. A full accrual budget will account for all of these aspects.
Full Accrual Budget
A full accrual budget and a cash budget will not match numerically. A full accrual budget will recognize and estimate values for which no cash may actually be received or paid during a certain period. It is used to estimate the revenue and expenses of a given period, to try to determine the amount of profit the business can expect to achieve.
A cash budget, on the other hand, will only plan for items in which cash has flowed into or out of an organization. The point is to ascertain whether or not the business has enough cash to sustain operations and whether it can extend credit to its customers without facing too many liquidity problems.
Christine Aldridge is a financial planner who has been writing articles related to personal finance since 2011. She has bachelor's degrees in political science from North Carolina State University and in accounting from University of Phoenix. Aldridge is completing her Certified Financial Planner designation via New York University.