Cash Cost
Cash cost is part of cash-basis accounting...that is, accounting for cash expenses and purchases in ledgers, as they occur. This sounds simple enough, but it gets tricky when the business also uses credit, as most do. This ledger does not add those credit purchases until the cash moves (the check is cashed).
Ever try to balance a checkbook? Probably not. Ask your grandparents about their checkbook-balancing war stories. It's tough. There's often several outstanding checks and you need to try to figure out which are still out there, uncashed...It's hard to keep track of.
Probably for that reason, and just general ease, most companies now use the accrual method. The accrual method recognizes both cash and credit, and expenses and revenue, as they happen, and matches them using the matching principle. This way, the business isn't issuing checks and waiting to record them until...well, until whoever has them cashes them.
Just imagine, if Harry Potter sent a check in the mail, and the owl got lost, and it takes 3 months of correspondence to realize it's been lost...that's 3 months the check can't be added. Birds, right?
Related or Semi-related Video
Finance: What is Accrual Accounting?39 Views
Finance a la shmoop... what is accrual accounting? well there are two
religions in the way in which beans get counted the first is cash accounting [Cash accounting building]
which just tracks cash in the door and cash out the door in any given period [Cash enters door and exits]
the second is accrual accounting which tries to guess or impute the values
coming in and going out in a given firm hoping to give a true picture of how
well or poorly a company is performing financially and you might ask how cash
and accrual accounting can be different like aren't beans just beans that you
count well stay tuned here in accrual accounting you might have an obligation
like an employee bonus which you think is highly likely to be paid at the end [Employee happy at getting a bonus]
of the year almost treated like debt the employee makes 6 grand a month and is
very likely due 10 grand in bonus money at the end of the year it's payable on
December 31 that's when the cash would go out the door of the company but given [Cash exiting the door]
that it's highly likely to be paid or earned by the employee so they'd have a
legal claim on that 10 grand the company using accrual accounting would accrue
the liability labeled something like bonuses or or is it bony well something
like that bonus is payable.. and would accrue the
value of 10 grand divided by 12 because that's the number of months in a year in
California anyway or about 833 dollars a month throughout the year that's how you [Employee bonus divided by 12 months calculation]
would accrue for that likely bonus now promising an employee a bonus and not
giving it to them after they've earned it well that would be a cruel accounting [Person holds out cash to employee and takes it away]
a totally different thing and much more mean-spirited