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Constant item purchasing power accounting

BREAKING DOWN Financial Accounting

Financial accounting utilizes a series of established accounting principles. The selection of accounting principles to use during the course of financial accounting depends on the regulatory and reporting requirements the business faces. For U.S. public companies, businesses are required to perform financial accounting in accordance with generally accepted accounting principles (GAAP). International public companies also frequently report financial statements in accordance to International Financial Reporting Standards. The establishment of these accounting principles is to provide consistent information to investors, creditors, regulators and tax authorities.

Accrual Method vs. Cash Method

Financial accounting may be performed using either the accrual method, cash method or a combination of the two. Accrual accounting entails recording transactions when the transactions have occurred and the revenue is recognizable. Cash accounting entails recording transactions only upon the exchange of cash. Revenue is only recorded upon the receipt of payment, and expenses are only recorded upon the payment of the obligation.