The Accrual Basis Of Accounting Is Far Superior To The Cash Basis Of Accounting
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The Accrual basis of accounting is far superior to the Cash basis of accounting. Discuss. The difference between accrual and cash basis of accounting is cash basis accounting recognizes revenues and expenses depends upon on timing. Cash basis accounting is simple, recognizes revenues when cash is received and recognizes expenses when cash is paid out only. It does not record accounts payable or receivable. For example, paid a service invoice on Feb, the expenses will be recognized as expenses on Feb, although the service has received on Jan.
The advantages of cash basis accounting are, easy to learn, less time consuming to handle, cash flow easy to be tracked and managed, income subject to tax when the actual income is received. Most of small business with no inventory using this method as it provides simple method to manage financial information and to maintain an accurate cash flow record.
Accrual basis accounting recognizes revenues and expenses at the time of activity occurred, unrelated to when the cash was received or paid. Meaning is, company records revenues or sales at the time it earns or occurs; example as, a sales invoice was issued on Jan, irregardless the payment only receive on Feb or later, the sales income is recognized as Jan income. As for company expenses will be recorded when received or used, even though the supplier invoice has not been received, an example, utility bills normally will receive after month, but this expenses need to be recorded as current month expenses.
I agree with the accrual basis of accounting is far superior to the cash basis of accounting. Even though cash basis accounting provides financial information too, but it cannot reflect the real financial position and future benefits, by contrast, accrual is reflects more real business finances. Refer to the World Bank (1), ‘accrual accounting is that it provides accountability for the company’s resources and how those resources are used.’
As accrual accounting practice, an asset is to be recognized when the ownership has. Under this accounting method, it allows us to manage assets to determine the assets value of useful life and future benefits. By contrast, cash accounting only recorded the transaction when the actual invoice was paid, it does not reflect the actual value.
Under accrual accounting, it identifies all obligations of the business. Under cash accounting, liabilities will not recorded, only expenses are recognized when the payment made. For example, annual service bill was recorded for the month paid; it will not shift into other months or periods. The expenses are high and affected the profit of the month.
Under accrual accounting system, it is more it provides more accurate assess of business performing and financial position over the long term. Other benefits stated in Money instructor (2) are ‘more cost-effective and efficient use of resources; the full cost of providing your product or service can be compared across industry standards; improved accountability and better financial management.’ With the financial information, it helps companies with business analysts to seek for investors and apply for loans. Conclusion, choosing of the method of accounting, is depending on the type business running. Cash basis accounting is simplicity, it allows small business such as food shop, small trader etc with no accounting background or high education to operate business and maintain their cash flow easily. The accrual accounting is to be implemented when the business grows, need to keep inventory of good to sell, or seek for loans.
(1) World Bank, Annex-D Benefits of Accrual Accounting, viewed 28 January 2015,
(2) Money Instructor, Accrued Based Accounting, viewed 28 January 2015,
accrual accounting is that it provides accountability for the company’s resources and how those resources are used
The basic difference between cash and accrual methods of accounting is related to timing of revenues and expenses. Cash basis recognizes revenues when money comes in and recognizes expenses when money is paid out. Cash basis doesn't recognize accounts receivable or payable. For example, only when you pay a bill do you recognize an expense. Accrual basis recognizes revenues when they are earned. That is, the company records revenue when it earns it, even if the customer hasn't paid yet. For example, a contractor using accrual accounting records total revenue earned when he completes the job, even if the customer hasn't paid the final bill. Expenses are handled in the same way. The contractor records any expenses when they occur, not when they are paid. Significance
The difference between cash versus accrual can be huge. Suppose you have a business with these transactions: 1. Received a bill for $4,000 for work done this month by a consultant 2. Paid $100 for a phone bill
3. Sent out an invoice for $10,000 for service fees performed that month 4. Received $100 in fees income
If you were using cash basis, your profit for that month would be $0 ($100 in fees income minus $100 in phone bill). If you were using accrual basis, your profit would be $6,000 ($10,000 in service fees minus $4,000 in consultant expenses). Benefits and Disadvantages
The benefits of the cash method are that is simple, flexible and takes cash flows in consideration. Income is not taxed unless it is received. The disadvantage is that there is no control of accounts receivable and accounts payable, especially long-term ones. Running a business is more than just seeing money come in and out, and cash basis gives you a too-narrow view of business finances. The benefits of the accrual method are that it is accepted by GAAP and gives a better idea of real income and expenses within a time period. The accrual method gives a long-term picture of the business, unlike the cash method. The disadvantage is that cash flow and analysis may go on the back burner. Also, accrual is more complicated than the cash method. Considerations
When looking at financial statements or other reports, there are clues that indicate if you're looking at an accrual report or a cash report. An accrual balance sheet, for example, will show a number for accounts receivable and payable, and may present deferred revenues or prepaid expenses. A cash basis report will not show any of these accounts, only cash and owner's equity. When looking at an income statement, ask if the revenue reported is money received only, which indicates a cash-based statement, or if the revenue is made up of invoices sent out, which indicates an accrual-based report.