Cash method of accounting in the context of Generally Accepted Accounting Principles

Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on the cash method of accounting which can often be simple and straightforward. Larger firms most often operate on an accrual basis. Accrual basis is one of the fundamental accounting assumptions, and if it is followed by the company while preparing the financial statements, then no further disclosure is required. Accounting standards prescribe in considerable detail what accruals must be made, how the financial statements are to be presented, and what additional disclosures are required. The term generally accepted accounting principles (GAAP) was popularized in the late 1930s.

Some important elements that accounting standards cover include identifying the exact entity which is reporting, discussing any "going concern" questions, specifying monetary units, and reporting time frames.

Accrual accounting in the public sector is a method to present financial information on government operations. Under accrual accounting, income and expenditure transactions are recognized when they occur, regardless of when the associated cash payments are made. The difference between public sector accrual accounting and cash accounting is most apparent in the treatment of capital assets (i.e. equipment, buildings, and public infrastructure that lasts many years). Under accrual accounting, expenditure on capital is added as an asset in the government's balance sheet in the year the capital is purchased, but the cost is not included in the year's budget as an operating expense.Instead, payment for capital used (i.e., the estimated depreciation or amortization) is included in that year's budget as an operating expense.

The usefulness of accrual accounting in the public sector remains in dispute. Advocates say a government that employs accrual accounting is less likely to underinvest in public infrastructure since large up-front capital costs are not recorded as a current period expenditure — rather, the expense is recorded over the years the capital is used (depreciates). Detractors counter that, following this reasoning, since the capital purchase does not generate a current period expense, accrual accounting may encourage excessive spending on capital and borrowing.