Letter to the Editor: Cash vs. Accrual

February 14, 2025

by Jim Race

At the FCSA Town Hall Meeting February 1, 2025, President Lisa Vale found it necessary to make a sales accrual entry to the P&L presented to the members to obtain the desired profit number. In essence this falsifies the statement presented by combining the cash and accrual accounting systems willy nilly. It also demonstrates her acknowledgement that the accrual accounting system is superior and more accurate. FCSA has no qualified accounting person on the staff or the BOD and is apparently taking poor advice from a “financial consultant”.

Accurately communicating the accurate financial status of FCSA is the function of the financial statements. The current BOD does not appear to understand this purpose. It does not help to blame your predecessors for the communication et al failures of your presidency.

BYLAWS of THE FORT CLARK SPRINGS ASSOCIATION
A Texas Non-Profit Corporation
ARTICLE IV
Board of Directors

1. POWERS: Subject to limitations imposed by the Revised Declaration of Protective Restrictions and the Bylaws, the power of the Association shall be under the authority of, and shall be controlled by, the Board of Directors. The Board shall have the following powers, duties, and responsibilities.

7. To obtain an annual independent audit of all accounts held by or for the Association with copies made available to the Lot Owners.

Per Google AI, Cash accounting records income when cash is received and expenses when cash is paid out, while accrual accounting records income when it’s earned and expenses when they’re incurred. Accrual accounting is more accurate and provides a better picture of a company’s financial health.

When to use each method:

• Cash accounting:
This method is often used by small businesses (Mom and Pop) and for personal finances because it’s simpler. However, it can be misleading because it doesn’t reflect a company’s true financial situation.

• Accrual accounting:
This method is better for businesses that use inventory or need to follow GAAP. It’s more accurate and provides a better picture of a company’s financial health.

Accrual Accounting Methodology

Accrual accounting is the preferred approach for companies reporting their financial statements under generally accepted accounting practices (GAAP), which are issued through the standards of the Financial Accounting Standards Board (FASB).

Accrual accounting requires companies to record sales at the time in which they occur. Unlike the cash basis method, the timing of actual payments is not important. If a company sells an item to a customer through a credit account, where payment is delayed for a short term (less than a year) or long term (more than a year), the accrual method records the revenue at the point of sale.

This can be important for showing investors /(members) the sales revenue the company is generating, the sales trends of the company, and the pro-forma estimates for sales expectations. In contrast, if cash accounting was used, a transaction would not be recorded for a while after the item leaves inventory.

Investors would then be left in the dark as to the actual sales performance and total inventory on hand.

Key Takeaways:

• There are two accounting methods practiced by companies: the accrual accounting method and the cash accounting method.

• Only the accrual accounting method is allowed by generally accepted accounting principles (GAAP).

• Accrual accounting recognizes costs and expenses when they occur rather than when actual cash is exchanged.

• The matching principle of accrual accounting requires that companies match expenses with revenue recognition, recording both at the same time.

• Only public companies are required to use the accrual accounting method.

GAAP

Accrual accounting is another term for the matching principle. This requires that companies match revenues with the expenses incurred to generate them. Non-listed companies may choose to follow GAAP if they require financing or if their accounts are scrutinized by a third party, for example, they are required to be audited. GAAP prefers the accrual accounting method because it records sales at the time they occur, which provides a clearer insight into a company’s performance and actual sales trends as opposed to just when payment is received.

Submitted by Jim Race