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