Nonprofit organizations are required to show financial statements based on the accrual method of accounting and the way it is different from the cash basis of accounting is that cash basis accounting is a transaction that is recorded only when the cash goes out or comes in.
Cash basis accounting is when the transaction is occurring at that exact moment for example an invoice needs to be paid at that time cash is disbursed out and paid on the spot. Another example is when someone is purchasing an item and cash is received at that exact moment of purchase that would be a cash in transaction.
Accrual accounting is important because you can record revenues that have placed even if payment has not been received yet for example an order was placed but it was paid through credit and the funds have not been paid but there was an invoice created for that account which will eventually be paid. This still needs to be recorded in the financial expense books so that the current month of revenue matches the month of expenses. This shows how the company or organization is financially doing during this time, as stated in Financial Management Chapter 3 “Accrual accounting provides more complete financial picture of human service agency”.
In an accrual system the revenues does not equal cash because the cash financial records needs to match what has been received and if the payment has not been made then there is no actual proof that there is cash received at that time. Revenue is cash earned and proof of payment from the consumers is shown during that exact moment payment is received.
The importance of cash flow statement in a financial management of an organization is that you can see where the company stands in a financial point of view, you can see if the money is depleting, or if too much money is being used for expenses or if the company is incurring positive cash flow. The statement can show you if the organization is becoming...