MERITS OF ACCRUAL BASIS ACCOUNTING

There exist just two methods that help organizations keep financial books; these are cash accounting and accrual accounting. Applying these two different accounting systems to record transaction results into varied outcomes at the conclusion of the period. The accrual accounting reports revenues when they are earned while the cash accounting reports revenues when the cash is picked up. In summation, in accrual accounting one report expenses when they are incurred and matched with revenues generated. In cash accounting, one report expenses when cash is paid (Martin, 2001). Even though the firm has to choose one accounting system, the most preferred accounting system is accrual accounting in various corporations, because it is thought to offer a more accurate financial standing of the firm. This report tries to talk over differences between cash accounting and accrual accounting, why accrual accounting is indispensable, and the implication of a cash flow statement with respect to financial management of the firm.

Even though accrual basis accounting and cash basis accounting are two distinct methods used to maintain financial books, each process focuses on different recordings and different reporting time frame pertaining to costs and revenues. Cash accounting lacks records of receivables, payables, and ability to track partial payments. This is because revenues are documented the day they are received despite when they are made. Charges as well are documented when they are paid as antagonistic to when they are experienced. This is contrary to accrual basis accounting because revenues are documented when they are made, and expenses are documented when they are incurred rather than when they are compensated. For instance, if a car hire bills a firm for the vehicles they hired in January but the bill is not due for payment until February. Accrual accounting will report the revenue from the hire in the books of January. The accrual accounting method is critical because it reflects the organizations results regarding their operations. Accrual accounting basis provides a clear image of the firm’s operation such as profit and loss within the operations, by providing the ability to go after payments. Thus, in accrual accounting income does not match cash for that time since credits are inclusive.

Comparing both accrual accounting and cash accounting, several people find accrual accounting to be more precise. It is more accurate in acknowledging not only cash transactions, but also non-cash transactions. Accrual accounting is better because at the time of measurement expenses and income match up. According to Rich et al. (2009), cash accounting fails to recognize income and expenses at the actual time of the business activity; instead it is focused on the exchange of money. Kimmel (2010) claims that because of this accrual basis of accounting provides succinct information to managers running a house. It demonstrates the company’s profitability during the accounting period.

It is clear that the accrual basis of accounting portrays an accurate image of the fiscal climate of any manufacture. Recording expenses as they occur and incomes as they are earned permits a firm to track its progress. This further allows the firm to avert losses and excessive high profits as experienced by cash basis accounting.

References

Kimmel, P. D. (2010). Financial accounting; tools for business decision making. 5th ed. Hoboken, New Jersey: Wiley.

Martin, L. (2001). Financial management for human service administrators. Needham Heights, MA: Allyn & Bacon

Rich, J., Jones, J., Mowen, M., & Hansen, D. (2009). Cornerstone of financial accounting. 2nd ed. South Western, Canada: Cengage Learning