Accounting Report: Analysis of Delayed Wage Payments at BizCon Company

This accounting report examines the reasons for delayed wage payments at BizCon, a consulting firm, during its first year of operations. The report highlights the differences between accrual and cash accounting methods, crucial to understanding the firm's financial challenges. BizCon offered extended payment terms to clients while facing immediate cash demands from suppliers and for salaries and insurance. The report explains how the accrual method, which recognizes revenue when earned, led to a positive net income despite a cash shortage, as payments from clients were delayed. It contrasts this with cash accounting, which records transactions based on actual cash flow. The report emphasizes the importance of managing cash balances and the potential benefits of using a combination of both accounting methods. The analysis provides insights into the financial implications of differing payment terms and the need for timely customer collections to ensure sufficient cash flow for operational expenses, including timely wage payments. The memo format addresses the Chief Financial Officer, offering a detailed explanation of the situation.

Running head: ACCOUNTING
Accounting
Name of the Student
Name of the University
Author Note

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Table of Contents
Memo...........................................................................................................................................2
References....................................................................................................................................5

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Memo
TO: The Chief Financial Officer
From: The Senior Accountant
Date: 6 February 2020
Subject: Explanation of the delayed wage payments
This is to notify you about the delay in wage payments to the employees for the past
month and to comprehensively explain the reasons for the same. An analysis has also been
conducted to thoroughly explain the concepts of accrual accounting and cash accounting. The
differences between both the concepts is the primary reason for the adverse situation being faced
by the company. Hence, despite having a positive net income, we are facing a shortage of cash.
The accrual basis of accounting is done based on Generally Accepted Accounting
Principles (GAAP). The GAAP has long been known to be the standard-bearer of the U.S.
accounting system. The basic nature of the accrual system accounting recognizes income and
expenditure when they are earned (Evans et al., 2015). This is different from the concept of
physically paying the expenses or earning the income from operations. The basis for this is the
matching principle that states that the income and expenses should be recognized only for the
period for which they were earned or incurred as a part of the business. Cash accounting, as the
name suggests is a form of accounting which records the expenses and income received in terms
of cash. Transactions are recorded under the cash accounting only if there is an actual inflow or
outflow of cash as a part of the business (Brusca et al., 2016). Hence, there occur situations when
a business may have earned profits but are unable to find the required cash to meet their

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expenses. This is because accrual accounting is not concerned with the inflow and outflow of
cash in terms of measuring the overall profitability of a business.
In case of our business, we have initially encouraged our customers to delay the payment
of their dues for as long as six months. However, the services provided to them will be recorded
as a revenue in the accrual concept for the period when the services were provided. This means
that the actual cash for those services will be received on a later date. However, due to the
relatively new nature of our business, we are unable to receive similar conditions from our
suppliers. They suggest that we need to make their payments on an immediate basis. Similarly,
we also need to make the wage and insurance payments on an immediate basis. For these to
happen, we need to have sufficient cash balances with us. To maintain appropriate cash balances,
we need to make collections from the customers on a timely basis. In order to record the cash
balances available with us, a cash accounting system that records the cash flows on a recurring
basis needs to be maintained. However, our failure to do so along with the non-payment by the
customers has resulted in the shortage of the cash balances necessary for making the wages
payments.
As we tend to implement an accrual system of accounting, the services provided to the
customers are recorded as a part of the revenue earned by us. This is the case unless there is
sufficient evidence that payment would not be received from them. In that case, this transaction
would be recorded as a loss (Goel, 2016). However, the high amount of revenue generated by us
as a part of the business has resulted in an increase in the income of the business. Thereby, our
net income for the year turned out to be positive. However, this income has not been converted
into cash due to the lack of payment received by us in the same period. The cash balances need
to be maintained at an appropriate level to make the payments without any delay (Toma, Carp &

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Robu, 2015). However, due to the accrual system of accounting, we have been unable to keep a
track of our cash balances and ultimately ended up without sufficient amounts to clear the dues.
A better accounting policy would be to use both the cash accounting and the accrual accounting
system in combination with each other.

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References
Brusca, I., Caperchione, E., Cohen, S., & Rossi, F. M. (Eds.). (2016). Public sector accounting
and auditing in Europe: The challenge of harmonization. Springer.
Evans, M. E., Houston, R. W., Peters, M. F., & Pratt, J. H. (2015). Reporting regulatory
environments and earnings management: US and non-US firms using US GAAP or
IFRS. The Accounting Review, 90(5), 1969-1994.
Goel, D. (2016). The earnings management motivation: Accrual accounting vs. cash
accounting. Australasian Accounting, Business and Finance Journal, 10(3), 48-66.
Toma, C., Carp, M., & Robu, I. B. (2015). Harnessing Financial Information in Investors
Decissions: Accrual Accounting versus Cash Accounting. Procedia economics and
finance, 26, 1044-1051.