Cash Basis and Accrual Basis Accounting Methods
According to the Finnish Accounting Act 30.12.1997 / 1336, expenses are recorded in the books as soon as the enterprise has received the related product or service, i.e., at the time the expenses are incurred. Similarly, revenue is recorded when the enterprise has delivered the product or rendered the service. In this case, expenses and revenues are recognized on an accrual basis (in Finnish, suoriteperusteen mukaan).
When a company purchases the factor of production such as, for instance, electricity, then this factor can be interpreted as a continuous stream of transactions: electricity is received while the machines are running. Factor received in this way cannot be recorded in the books at the time the expenses are incurred, instead electricity costs have to be recorded when the electricity bill is paid.
Similarly, interest and rents are accrued continuously during the whole month may be each day over the interest period and the lease term. Nevertheless, they are not entered in books of accounts on a daily basis, but only after they have been paid. In this case, expenses and revenues are recognized according to the payment basis or cash basis method (in Finnish, maksuperusteen mukaan). Thus, expenditure and revenue may also be recorded on the invoice date (invoice basis) or at the time of payment (cash basis). If expenditure and revenue are recorded on a cash basis, accounts payables and accounts receivables must be recorded separately.
In general, any of the accounting methods can be used for financial transactions recording. It should be noted, however, that the financial statements (annual report) must be prepared on an accrual basis. And if, during the financial year, the records have been made on a cash basis, then entries must be converted to accruals method prior to producing financial statements. When an accrual basis has been used during a financial year, no additional entries are required when preparing the financial statements.