Cash versus accrual accounting
Cash Accounting Simple example of cash accounting
⇐ Use this menu to view and help create subtitles for this video in many different languages.
You'll probably want to hide YouTube's captions if using these subtitles.
- To see the difference between cash accounting and accrual accounting
- I'm going to go through this little example
- and first I'm going to account for things
- using a cash basis of accounting
- and then we'll do it with an accrual basis accounting
- and just so you have some context,
- the cash basis is:
- anytime you get cash from a customer
- you would count that as revenue
- and anytime you have to spend cash
- you would count that as an expense
- you'll see that this is what most small businesses do
- while most slightly more sophisticated businesses
- would use accrual based accounting,
- because that matches up, kind of,
- your actual expenses and your revenue
- a little bit better in each period
- so let's just go through this example
- using the cash basis first.
- And we're gonna assume
- that we start off with no money.
- So in month one,
- you cater an event where the cost to you was $100
- The customer pays you $200 for your services
- And maybe they pay your $200 ahead of time,
- so that you have the cash to go buy
- the food and the paper cups and paper plates or whatever.
- So you get $200 in revenue
- this is a cash basis of accounting,
- and you have to spend $100 of that on supplies,
- and maybe you have to hire some help,
- and pay yourself a salary
- so, if you got $200,
- and you used $100 of that, your profit here,
- I'll do profit in green as well
- your profit is going to be
- (that's not green)
- your profit is going to be $100
- And if you started with no cash
- your cash at the end of period,
- This is going to be the cash at the end of month one,
- you will now have $100 of cash.
- Now let's go to month two
- You cater an event where the cost to you was $200
- You and the customer agree that
- they can pay you $400 the next month.
- So in this month, we have to use $200
- Maybe our bank lets us overdraft
- So let's say, we
- (I shouldn't write this as an expense),
- So I'd have to write negative,
- we're assuming this is going out,
- I'll write it in red.
- So, we're going to use $200,
- But we don't get any revenue
- because we're doing the cash basis accounting
- The customer's not paying us in that month
- They're paying $400 the next month
- So we get no revenue that period
- So it looks like we got no revenue,
- We had $200 of expenses.
- Our profit here is going to be negative $200
- and when we look at how much cash,
- we had $100 of cash entering into month two,
- We're using $200 of that,
- so now we've kind of overdrawn our bank balance.
- Maybe we owe our bank now $100
- Let's go to month two
- Month two, you get $400
- from the customer in the previous month
- You also get $200 in advance
- from a customer that you have to cater for next month
- So we've done no catering this month
- but we've gotten a lot of money
- We've got $400 from the previous month's customer,
- and $200 for a customer
- you're going to cater for next month
- So we've got $600 on a cash basis in revenue.
- And we had no expenses in that month.
- So we have $600 in profit,
- and our cash balance increases by $600,
- so the end of this month we now have $500.
- Now, month four: You cater the last customer's event.
- It costs you $100.
- So once again, you just have to spend,
- (I'm gonna do that in magenta)
- You just have to spend the $100 in month four
- to cater the actual event.
- But you got no revenue in that month.
- So it looks like you took a loss negative $100.
- And then your cash balance will go down to
- your cash balance will go down to $400
- So this is a cash basis.
- this is how a lot of businesses run it.
- But you can see there's a problem here.
- It looks like our profit is jumping all over the place.
- Sometimes we're profitable. Sometimes we're not.
- Sometimes we're profitable. Sometimes we're not.
- Even though our business is a little bit steadier
- than that would seem to imply.
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
|
Have something that's not a question about this content? |
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
abuse
- disrespectful or offensive
- an advertisement
not helpful
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
wrong category
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site
Share a tip
Suggest a fix
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.