ipl-logo

Pros And Cons Of Accrual Accounting

1360 Words6 Pages

22nd November, 2015 Laura Schim van der Loeff Academic and Study Skills Pros and cons of “cash-flow accounting” and those of “accrual accounting” Yuting Cui 10888217 In an entity, financial accounting, or bookkeeping is the tool used to keep track on financial activities. Users, for example: managers, stockholders, etc. use the result of financial statements to justify behaviors of the entity and make efficient decisions accounting to the data provided. With different basis, companies have various methods to do bookkeeping. Two methods mentioned in this paper are cash-flow basis and accrual basis accounting. Although both methods are applied to record accounting transactions, they vary two major aspects: timing of recognition and matching principles. …show more content…

One point needs to be mentioned here is the type, or objectives, of this entity. For example, comparing to a for-profit organization, a non-for- profit organization has less cash, less revenues and expenses, and less trade incur during its financial performance. Because no profitability is involved in this entity, it requires less work for managers in non-for-profit organizations to do cash-flow accounting rather than accrual accounting so that they can manage balance in hands, and do not need to take estimated future earnings, or profits, into account. In this paper, pros and cons of two methods are considered mainly within organizations which aim to maximize their profits. In comparison, advantages of cash based accounting are costs of accrual based for some extent. Firstly, cash-flow accounting requires less skills to comprehend for both bookkeepers and readers of the accounting book. In another words, accrual accounting is a systematic method, it has certain rules and regulations to perform. Thus accrual accounting is more complex than cash-flow to understand(Andy Wynne, 2004, p. 9). While applying cash based accounting, it is intuitive for managers to understand the firm’s financial performance when they see how much “cash” they actually have in bank account and also simple for accountant to record inflows and outflows. If accrual accounting is considered as an abstract idea, then cash-flow accounting is concrete since it represents numbers only when they really exist. Secondly, cash based accounting keeps better track on firms’ accounts than accrual accounting does. In the situation when after adaption of the valuation, the value does not equal to the book value, the benefits of cash-flow accounting is revealed because cash methods record transactions only until the payment has really occurred (Penman, 2001, p.688). Accrual

Show More
Related
499 Words | 2 Pages

They also found that the taxpayer did not have inventories and the cash method of accounting clearly reflected the appropriate income. Based on this decision, the Commissioner appealed. The Supreme Court found that the Commissioner’s decision to require a particular accounting method is a discretionary decision that should not be interfered with unless it is unlawful. The cash method of accounting is a popular method for many small businesses. In a cash accounting method, income and expenses are recorded when the funds are received or disbursed.

Read More
680 Words | 3 Pages

According to IAS 7 and ASC 230, companies can use either the direct method or indirect method for the statement of cash flows. Brown-Forman Corporation and Diageo selected to use the indirect method, and the presentation format is similar. One difference between the two company is ASC 230 required Brown-Forman to reconcile net income to cash flows from operating activities regardless of which method it uses (Deloitte). IAS 7 only required reconciliation when using the indirect method, “the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing

Read More
912 Words | 4 Pages

We utilize an accrual basis for accounting because it provides a much more

Read More
66 Words | 1 Pages

I 'm agree with Mayor Bloomberg, because he is doing an audit to find out about the slowdown of the guard at the prison in Rikers, as a result there are guards who block prisoners to testify against two guards that he was allegedly beaten. This should be penalized by the union, for the reason that, is illegal to block a person to testify and beat prisoners.

Read More
419 Words | 2 Pages

Some of the reasons for differences between the cash reported in the accounting records and the cash balance in the bank statement are: 1. “Deposits in transit are receipts entered on company records but not pro¬cessed by the bank, and (2) outstanding checks are written checks that have not cleared the bank. ”(K Wainwright, S. 2012). These are transactions that reflect on the accounting records but not on the bank statement. 2.

Read More
1534 Words | 7 Pages

Accrual accounting is an accounting method that recognizes economic events regardless of when cash transactions occur in order to measure the performance and position of a company. The general idea is that economic events are matching revenues to expenses to recognize which is the matching principle at the time in which the transaction occurs rather than when payment is made (or received). This method allows combining the current cash inflows or outflows with future expected cash inflows or outflows to give a more accurate picture of a company 's current financial condition. Accrual accounting is considered to be the standard accounting practice for most companies with the exception of very small operations. This method provides a more

Read More
552 Words | 3 Pages

In 2002, the SEC adopted new rules and amendments to address public companies’ disclosure or release of certain financial information that is calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles. The accrual accounting is more popular and be widely used in business world because it produces more accurate and faithful financial statements that constitute better representation of actual circumstances than its main competitors. The major weakness of accrual accounting is that there is some time issue such like the time of occurred and time of recorded would probably be different and it increases the risk of financial information and the risk of correctness. Also, the accrual accounting generally cost more to operate compared with cash accounting

Read More
1245 Words | 5 Pages

Generally, cash flow statements are divided into three main parts for reviewing the cash flow from of this three types of activities: (1) operating activities (CFO); analyzes a company’s cash flow from net income or losses. (2) investing activities (CFI); shows the cash flow from all investing activities. (3) financing activities (CFF); shows the cash flow from all financing activities. Although I discuss each financial statement separately, they are all related because any changes in assets and liabilities that on the balance sheet are also reflected in the revenues and expenses that on the income statement, which result in the company’s profits or losses. Cash flows provide more information about cash assets listed on a balance sheet and are related to net income on the income statement but not exactly the same, And so on.

Read More
1505 Words | 7 Pages

Introduction: Here in this assignment a management accounting report needs to be prepared for analyzing how management accounting can be useful in providing the managerial information for the purpose of decision making. The organization selected to make this analysis is Southwest Airline. It is a management accounting report in which starting from the background of the company, the management accounting system of the company has been analyzed and how its’ providing the information for the purpose of management decisions being evaluated. Background of the company: Southwest Airlines was shaped in 1978 with reason to serve voyaging service via air course. What's more, after consolidation southwest aircrafts persistently succeed regarding productivity, great worker and union connection and consumer loyalty.

Read More
1433 Words | 6 Pages

Under US GAAP, Financial reporting should provide information that is useful to present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise. (SFAC No. 1, para. 37) It is interesting to note that this is precisely the information that one would need to calculate the value of an enterprise. Thus, in setting accounting principles, the FASB appears to be emphasizing the valuation role of accounting information over other uses.

Read More
1122 Words | 5 Pages

Fair value became a significant topic during the financial crisis in the U.S. in 2008. People started penetrating for responses for the reason behind something so horrible that could happen and desired something to put responsibility on. For some, fair value accounting was to be responsible but like all debated topics, there were others on the other side of the topic disagreeing in favor of fair value accounting. Opponents of fair value accounting include the American Bankers Association (ABA), the Independent Community Bankers Association (ICBA), as well as Steve Forbes (editor-in-chief of business magazine Forbes as well as president and chief executive officer of its publisher, Forbes Inc.), Blackstop Group Chairman Stephen Schwarzman, Former

Read More
979 Words | 4 Pages

The choice of inventory accounting methods, specifically for the case of FIFO and LIFO, has developed into a decision, which includes varying consequences and comes with specific implications and benefits, such as communicating private information with FIFO (Hughes, and Schwartz, 1988, p.42) or tax benefits for the choice of LIFO (Morse and Richardson, 1983, p.125). Every firm and manager has to face the decision of which accounting method to choose, and has to include several aspects into their decision making process and weigh the pros and cons in general. However, the empirical evidence (Frankel and Hsu, 2015, p.48) shows some controversies as to what inventory accounting methods firms decided to use in the past, even though the theory would

Read More
741 Words | 3 Pages

Nowadays, the green awareness of the public is increasing from time to time. People tends to put more effort to protect the environment compared to those days. Organizations could achieve sustainability by meeting the current needs without destroying the environment. This leads to the implementation of environmental accounting. The environmental accounting can further classified into environmental financial accounting (EFA) and environmental management accounting (EMA).

Read More
1108 Words | 5 Pages

It is this that justifies accounting history as a crucially important academic discipline. “History, in itself is instinctive and indigenous to all of us” (Carnegie. et al, 2011), whether individuals know it or not, everyone’s decision making process is strongly based on past experiences, and the past is the key source resorted to whenever a decision is needed to be made. The same is applicable to accounting, the decisions made today in all practices and approaches are drawn from the historical developments in the accounting process, that have led the practice

Read More
1051 Words | 5 Pages

Self -Reflection on Module 8.2a Financial Management Before the commencement of the sub-module 8.2, we were supposed to choice either 8.2a (Financial Management) or 8.2b (Investing Social Security Reserves), because the sub-module is divided into two. I have decided to take the sub-module 8.2a, and during online VC sessions, I have had gained some basic knowledge from this subject (Financial Management). For me, this is the first time I had chance to learn about the subject, before that I have just heard some information about financial management only from a friend who studied Accounting and working as Auditor at Association of Chartered Certified Accountants (ACCA) consultancy in Ethiopia. From the beginning I am so much eager and impressed

Read More

More about Pros And Cons Of Accrual Accounting

Open Document