Commercial Accounting and Generally Accepted Accounting Principles

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Table of Contents

Generally accepted accounting principles (GAAP)
Commercial accounting
Accrual basis accounting
Cash basis accounting
Differences between cash basis accounting and accrual basis accounting

Generally accepted accounting principles (GAAP)

These are a set of rules which accountants must follow when preparing financial statements like balance sheets, cashflows statements, income statements, revenue recognition and measurements of shares for private companies and for publicly traded companies. These rules guide accountants in reporting and recording of any financial information. These sets of principles are useful to potential investors who want to make economic decisions about a company because they provide standardized financial statements

These guidelines also ensure that data in the financial statements are not interfered with or manipulated by the accounting professionals for self-gain.

Examples of these set of rules include monetary unit assumption, economic entity assumption, time period assumption, cost principle, matching principle, full disclosure principle among others.

Commercial accounting

This is a type of accounting system which is maintained by business organizations mainly to know the organization’s profit or loss and the financial position of that business or organization.

This type of accounting can be prepared either in cash basis or in accrual basis without any restrictions. It is also maintained by adhering to the set of rules/principles of GAAP (Generally Accepted Accounting Principles).

Accrual basis accounting

In this type of accounting, revenue is recorded during the time it is earned not bearing in mind the time it is received. Expenses, on the other hand, are subtracted in the time they are incurred whether they have been paid for or not. In simpler terms, when one uses accrual basis accounting, he/she records income and expenses when they occur.

Example: In a motor selling company, if you sell a vehicle worth $4500, revenue is recorded as soon as the sale is made regardless the time of receiving money.

This kind of accounting is most used especially in those companies that never transact their businesses in cash.

Cash basis accounting

This is an accounting method whereby income and payments are recognized when physical cash is paid out or received. This is a method most used by small businesses or organizations which use cash transactions in their day to day running of their businesses.

In cash basis accounting, the provisions for generally accepted accounting principles are not conformed hence it is not a good management tool.

Example: in a car business, if you sell a vehicle worth $4500 under cash method, that amount cannot be recorded in books until the customer pays that money to you. The same is true with payments.

Differences between cash basis accounting and accrual basis accounting

Both bases of accounting have the differences as shown hereunder

Accrual basis accounting	Cash basis accounting
This basis records income when it is earned, which means that it can be before or after they are received.	This method of accounting records income when they are received, hence it may be before or after they are earned.
Expenses in this type of accounting are recorded when they are incurred	We record expenses only when they are paid be it before or after they are incurred
In accrual basis, if payments are not received at the point of sale, receivables are recorded.	We do not record receivables on this type of accounting
If payments are not done in the time of purchase, payables are recorded.	In cash basis, no payables are recorded

These are just few of the differences between these two accounting bases

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Commercial Accounting and Generally Accepted Accounting Principles

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