cash basis and accrual basis

[Hessa Alshehhi]

good day for every one,

I have two inquiries need your clarification please:
1. first related to cash basis and accrual basis. if rented/ leased a place with US$ 24,000 and it being paid in advance for 12 months from 1 September, 2014, and I have a December year end. how can I differentiate between case basis and accrual basis for the above statement.

2. Moreover, I have been read that CEO one of the company has described an item in the financial statements of Brave Brands Marketing as “…a present obligation, arising from a past event, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.” i need to know how this statement is related to accounting terms .

Kindly explain it in details to me to understand it very well and thank you

 

[ICAEW]

No. 2 is clearly the definition of a liability.

Since that's out of the way, let's focus on point no. 1.

Cash basis of accounting in based on the idea that the item is recorded when the relevant cash flow occurs, so no amounts will ever be accrued. Following through with that logic, a prepayment is the opposite of an accrual, so the question you should be asking yourself is, should it occur? The answer would be no. You have to charge the expense as if it was incurred for the whole year.

 

[Fidget]

For #2:

“…a present obligation, arising from a past event, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.”

This is basically the criteria that needs to be met in order to create a Provision. Whichever accounting standards you are using will have a standard on Provisions, so you might want to look it up for further clarification.