5 ms·

It sounds like a classic example of how accrual bookkeeping can be misleading due to timing issues (the sale has already been booked even though the cash hasn’t

It sounds like a classic example of how accrual bookkeeping can be misleading due to timing issues (the sale has already been booked even though the cash hasn’t been collected). I know it has other advantages vs. cash bookkeeping, but cash is so much easier to understand that I have always chosen it whenever possible (i.e., for a service business).

eru 5y ago
If you have the data, either form of bookkeeping should be 'just' a shift in presentation? (I don't know whether the software used makes this easy?)
- HWR_14 5y ago
  Yes, a lot of software can toggle between them via a trivial UI toggle
  - eru 5y ago
    Thanks! Btw, you could also fit this into the conceptual framework of accrual accounting, if you modelled counterparty risk.
    - HWR_14 5y ago
      Could you? I thought accrual methods weren't allowed to think about future probabilities and had to decide on whether to recognize an event or not. I mean, if you had counterparty risk insurance, that would make sense. So I guess if you treated yourself as self insured, you would could create the same accounting treatment?
      - eru 5y ago
        I don't know about what's legally allowed or not. (Might also depend on jurisdiction.) From what I remember, in general you have to recognize outlays with certainty, but you have more leeway in how you treat inflows. In general, you can also keep whatever you want in your books and run them however you like; you just have a legal obligation to also keep accounts that are in line with established standards. You see this distinction in GAAP vs non-GAAP numbers in the US, where GAAP stands for Generally Accepted Accounting Principles. In banking there's an obligation to model counterparty risk; but I have to assume that banks keep multiple copies of their balance sheets and accounts around: One version for eg tax purposes, and another version for things like determining capital requirements and risk exposure; if different rules apply in the different domains.

eru 5y ago

If you have the data, either form of bookkeeping should be 'just' a shift in presentation? (I don't know whether the software used makes this easy?)

HWR_14 5y ago
Yes, a lot of software can toggle between them via a trivial UI toggle
- eru 5y ago
  Thanks! Btw, you could also fit this into the conceptual framework of accrual accounting, if you modelled counterparty risk.
  - HWR_14 5y ago
    Could you? I thought accrual methods weren't allowed to think about future probabilities and had to decide on whether to recognize an event or not. I mean, if you had counterparty risk insurance, that would make sense. So I guess if you treated yourself as self insured, you would could create the same accounting treatment?
    - eru 5y ago
      I don't know about what's legally allowed or not. (Might also depend on jurisdiction.) From what I remember, in general you have to recognize outlays with certainty, but you have more leeway in how you treat inflows. In general, you can also keep whatever you want in your books and run them however you like; you just have a legal obligation to also keep accounts that are in line with established standards. You see this distinction in GAAP vs non-GAAP numbers in the US, where GAAP stands for Generally Accepted Accounting Principles. In banking there's an obligation to model counterparty risk; but I have to assume that banks keep multiple copies of their balance sheets and accounts around: One version for eg tax purposes, and another version for things like determining capital requirements and risk exposure; if different rules apply in the different domains.