Daria Dobreva, Business and Management – Group 25 | N 123 017

ACCRUAL VERSUS
CASH BASIS ACCOUNTING
Daria Dobreva, F.№123 017, Business and management, Gr. 25

Table of contents:
I. Introduction
II. Cash basis
III. Accrual Basis
IV. Cash flow vs. revenue
V. Income Statement vs. Cash Flow Statement
VI.Negative Cash Flow
VII. PQ1(What is the amount of net income for both companies? Does it differ much from the
cash flow from the operating activities and why?)
VIII.Cash flow from financing VS Cash flow from investing

I. Introduction
The principal methods of accounting, cash accounting and accrual accounting, make it easy
to keep track of business income and expenses. Your choice of accounting policy determines
when you recognize income and expenses. In accrual accounting, revenue and expenses are
recorded in the period in which they are earned or incurred, regardless of cash flow. Cash
accounting, on the other hand, recognizes revenues only when customers pay cash while
expenses are recorded when cash is received.
The differences between the cash and accrual methods of accounting are explained in this
report. The report's explanations and examples provide a strong emphasis on the fundamental
ideas needed to understand both the cash and accrual methods of accounting.

II. Cash basis

Since the cash basis of accounting is easier to use than accrual accounting, it is typically more
widely used to record and report revenue, expenses, and income. Income and costs are
recorded when a payment is made or received in cash accounting. However, the cash
approach does not fairly represent a company's assets, liabilities, revenues, or costs.
The financial accounts of a company may convey a distorted financial situation if it incurs
significant costs to deliver a service before receiving payment for the service. Similarly, this,
if a company receives a sizable payment but has not yet produced the good or rendered the
service, a considerable distortion in the financial status of the company will be reported in the
financial accounts.

III. Accrual Basis

The accrual basis of accounting is in accordance with GAAP. U.S.-based publicly traded
companies are required to file financial reports with the Securities and Exchange Commission
(SEC) under GAAP accounting.
When revenue and expenses are recognized and how assets and liabilities are represented
under the accrual basis are different from those under the cash method. A more accurate
picture of a company's performance over the periods being measured is provided by accrual

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accounting. The reporting period for the majority of businesses is typically a fiscal quarter or
fiscal year.
The main focus of accrual accounting is on two categories of business events. First, from the
standpoint of an asset, an accrual is recorded whenever a business delivers a service or a good
but has not yet been paid for it. Similar to this, when a service or product is supplied but
payment has not yet been paid, an accrual is recorded from the perspective of a liability.

IV. Cash flow vs. revenue

1. TQ:
Before we look at the differences between cash flow and revenue, it is necessary to clarify
what each term means and how to determine these figures.
- Cash flow is the net sum of all money transfers into and out of the organization. Revenue is
the money a business makes by selling its services and goods. Cash flow shows the amount of
money a firm has available to spend, whereas revenue shows the value of its marketing and
sales. It's important to remember that cash flow can be negative, in contrast to revenue.
- Costs that have been expended or incurred as a result of generating revenue or operating a
business are considered expenses under the accrual method of accounting. A payment is a
money disbursement (usually in the form of a check or currency). While many payments are
not expenses of the present period, certain payments—like the rent for this month—are
expenses of the current time.
- Revenues are recognized on the date on which the sale occurs and are therefore included in
the gross income of a company in the income statement. The principle of revenue recognition,
a feature of accrual accounting, requires that revenue is recognized in the income statement in
the period in which it is realized and earned - not necessarily when it is received in cash.
Realizable means that the customer has received the goods or services, but payment for the
goods or services is expected later. Earned revenue is recognized for goods or services that
have been delivered or rendered.

2. TQ V. Income Statement vs. Cash Flow Statement

- The cash flows from a company's investing, financing, and operating activities are listed on
a cash flow statement. Users can view a company's sales, profits, costs, and losses over a
certain time period by consulting an income statement.
- An income statement is based on an accrual basis (due or received), whereas a cash flow
statement is based on the actual receipt and payment of cash. This is the main distinction
between an income statement and a cash flow statement.

Income statement
- The income statement is designed to show how much profit your business made during the
specific reporting period covered by the statement.
It is also sometimes called a profit-and-loss (P&L) statement or an earnings statement.
It shows your:
 revenue from selling products or services
 expenses to generate revenue and manage your business
 net income (or profit) that remains after your expenses
Along with the following other statements, an income statement is a vital part of a company's
financial statements:
 balance sheet
 cash flow statement
 statement of retained earnings

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Cash flow statement

The purpose of a cash flow statement, as opposed to an income statement, is to show how
much money your company makes (sometimes referred to as cash inflows) and how much
money it spends (known as cash outflows).
Importance of a cash flow statement
 Gives details about spending: A cash flow statement gives a clear understanding of
the principal payments that the company makes to its creditors.
 Helps maintain optimum cash balance: A cash flow statement helps in maintaining
the optimum level of cash on hand.
 Helps you focus on generating cash: Profit plays a key role in the growth of a
company by generating cash. But there are several other ways to generate cash. For
instance, when a company finds a way to pay less for equipment, it is actually
generating cash. Every time it collects receivables from its customers quicker than
usual, it is gaining cash.
 Useful for short-term planning: A cash flow statement is an important tool for
controlling cash flow. A successful business must always have sufficient liquid cash to
fulfil short-term obligations like upcoming payments.
Which Should you use?
You should consult your company's income statement if the decision you're making has to do
with the profitability of your enterprise, for instance, if you're trying to determine whether
you're making a profit or a loss. However, the cash flow statement will be more useful if the
choice you need to make has to do with, for instance, the amount of debt your organization
may responsibly take.

3. TQ VI.Negative Cash Flow

Negative cash flow is when your business has more outgoing than incoming money. Sales
cannot be used to pay all of your expenses. Instead, you must obtain the necessary funds
through financing and investments.
For instance, if your sales in April was $5,000 and your expenses were $10,000, your cash
flow was negative.
Negative cash flow might occasionally indicate a loss for your company. Negative cash flow
can also be the result of improper timing of expenses and income.
Net gain and negative cash flow are both possible. Your bills, for instance, can be due before
a client pays an invoice.

4. PQ 1
 Bulgarian Energy Holding (BEH)
Bulgarian Energy Holding EAD is the holding company for a group of companies which are
principally engaged in electricity generation, supply and transmission, natural gas
transmission, supply and storage and coal mining. BEH is the successor of the state-owned
company Neft i Gas (Oil and Gas) established in 1973.
The company is 100% owned by the Bulgarian government and it is the largest state-owned
company in the country on the basis of the owned assets.
Net income
According to the annual financial report (5th September 2022, 16:26 EEST), Bulgarian
Energy Holding (BEH) reached 2.2 billion BGN ($1.11 billion/1.12 billion euro) in the six
months through June from roughly 162 million BGN a year earlier.
During the first six months of 2022, the Company reported a profit at the amount of BGN
985,218 thousand, where, compared to the same period in 2021 (BGN 410,407 thousand), a

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significant improvement of BGN 574,811 thousand was reported.

Cash flow
The cash flow of BEH for 6 months as of 30th June, 2022 is BGN 2,177,609 compared to
BGN 952,602 (2021)
The cash flow from the operating activity exceeds the net income because there is an increase
in accounts receivable.
 Ina Essentials LTD
Ina Essentials LTD is a Bulgarian cosmetics family company that has been engaged in
organic farming and organic processing of essential oil crops for more than a decade.
In essentials currently has an online store and presence in 16 EU Markets:
Bulgaria, Germany, Romania, Great Britain, Slovakia, Poland, Czech Republic, Italy, Spain,
Portugal, Holland, Greece, France, Netherlands, Belgium, Ireland.
Ina Essentials LTD is based in Bulgaria, with the head office in Plovdiv.
It operates in the Toilet Preparation Manufacturing industry. Ina Essentials LTD was
incorporated on November 27, 2000. It currently has a total number of 132 (2022) employees.
In 2021, the company reported a net sales revenue drop of 36.18%. There was a total negative
growth of 4.99% in Ina Essentials LTD’s total assets over the same period.
In 2021, Ina Essentials LTD’s net profit margin decreased by 0.4%.
In annual terms, sales marked a fall of 1.07% compared to 2022. In comparison, to 2021 they
went up by 9.54%. In 2022 sales rose by 10.72% year-on-year.
The Manufacture of chemicals and chemical products industry total revenue make up 3.22%
of the country's GDP in 2022, compared to 3.34% in 2021 and 3.13% in 2020.

Cash flow and net income statements are different in most cases because there is a time gap
between documented sales and actual payments.
Non-cash expenses, such as depreciation, amortization, and share-based compensation, must
be included in net income, but those costs do not reduce the amount of cash a company
generates in a given period. As a result, these expenses are added back into the cash flow
statement

PQ 5: VII.Cash flow from financing VS Cash flow from investing

The money a business makes from its investments is known as cash flow from investing. This
can include proceeds from the sale of investments, stock dividends, or bond interest. Cash
flow from investments is significant because it reveals how successfully a business is
managing its investments. A corporation may need to reassess its investment plan if it is not
producing enough cash flow from investments.
Cash flow from financing is the cash that a company brings in from its financing activities.
This could include money from the sale of new shares, loans, or bonds. Cash flow from
financing is important because it shows how well a company is doing with its financing. If a
company is not generating enough cash flow from financing, it may need to re-evaluate its
financing strategy.
Investing activities refer to earnings or expenditures on long-term assets, such as equipment
and facilities, while financing activities are the cash flows between a company and its owners
and creditors from activities such as issuing bonds, retiring bonds, selling stock or buying
back stock.

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Sources of information:
https://sgp.fas.org/crs/misc/R43811.pdf
https://bgenh.com/storage/app/public/uploads/files/reitingi/COP_211220.pdf
https://bgenh.com/storage/app/public/uploads/files/finans/2022/30.06/
FSBEH_separate_30062022_signed.pdf
https://www.linkedin.com/redir/redirect?url=https%3A%2F%2Finaessentials%2Ecom
%2F&urlhash=Hojs&trk=about_website