Explaining the Difference between Cash and Accrual Accounting The accounting department at Klinger Realty sent the financial reports, as shown below, to Robin Garrison, general manager. Attached was a note indicating that both sets of data are based on the same set of events, which occurred during the quarter just completed. Robin was only recently promoted to this position and is not very knowledgeable about accounting information. After reviewing this report, Robin was somewhat disturbed because she always had thought accounting was an exact process. How, she wondered, can there be two different results from the same set of facts? Furthermore, how could they be so different? Which one is the “true” or “correct” report?
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Klinger Realty |
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Cash Basis |
Accrual Basis |
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Cash receipts/revenues: |
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Sales commissions |
$300,000 |
$400,000 |
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Property management |
210,000 |
165,000 |
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Total |
$510,000 |
$565,000 |
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Cash payments/expenses: |
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Office employee wages |
53,000 |
48,000 |
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Advertising |
10,000 |
90,000 |
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Office supplies |
0 |
3,400 |
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Depreciation—office |
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equipment |
0 |
1,800 |
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Rent |
6,000 |
6,000 |
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Sales staff commissions |
150,000 |
200,000 |
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Property managers’ salaries |
116,000 |
90,000 |
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Total |
335,000 |
439,200 |
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Net cash flow |
$175,000 |
$125,800 |
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Net income |
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Required Assume that you are called in to advise Ms. Garrison. Write a memo to her explaining why there can be two measures of operating results and why they differ.