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Advantages Of Accrual Accounting And Cash Flow Accounting

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Accrual accounting and Cash flow accounting are critical factors which contribute to judgments and decision-makings that lead to a successful business. It is debatable whether accrual accounting is preferred to cash flow accounting, while there are some financial economists are in favor of using cash flow basic to report. This chapter will first give a foundation of accrual and cash flow accounting, then discuss the advantages as well as drawbacks of both methods and give the conclusion which type of accounting is suitable to record. Accrual accounting is an accounting that revenues are recognized when sales have been made and expenses are recorded when they are incurred, even the cash receipt from the revenue or the cash payment related to …show more content…

According to Marsha (2014), the main purpose of cash flow statement is to inform information about the change in cash receipt and cash payment during the period. On the one hand, there are several reasons why cash basic is well accepted by financial economists. The primary benefit of cash-based accounting is simpler to understand than other accounting methods (Tudor and Mutiu, 2006, p.2). Due to the cash rule, users are less likely to be confused due to the variety of financial information between revenues and expenses so effort to match an expense with the revenue it generates it’s not necessary. (Tudor and Mutiu, 2006, p.2). Another benefit of using cash flow is that this method can also be viewed as a method of measuring firm’s performance in some extent. According to Marshall (2014), there are there categories under cash flow basic: cash flows from operations, cash flow from investing and financing activities. These there approaches will explain users the overall change of cash during the year. If the cash from operations exceeds cash flows from investment, that reflect a good sign of firm’s performance. Besides, a questionnaire will be created if the cash used from investing activities exceeds the cash provided from operating activities in the short term. However, a problem will rise about whether the ability of the firm could still generate cash if this situation happens too often. Marshall (2014) gives a conclusion that the statement of cash flow delivers important financial data to users that is really difficult to find in other financial statements such as the accrual basis income statement. Although this statement under accrual based accounting is related to revenue and expense, it does not contain information about cash flow form the three above activities. Furthermore, cash-based accounting can provide users the

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