Wednesday, March 14, 2012

Why is the Accrual Basis of Accounting the preferred method of Financial Reporting for large companies instead of the Cash Basis of Accounting?

Why is the accrual basis of accounting the preferred method of financial reporting for large companies instead of the cash basis of accounting?

First, the accrual basis of accounting provides a more accurate snapshot of the company's current condition. For example, when the company sells its products (as in the transfer of ownership takes place and the company no longer possess the item). If a credit sale has occurred it affects the company financial statement making accrual accounting reflect the economic condition more appropriately than a cash basis accounting.

Furthermore, a company will most likely have accounts payables and accounts receivables. Depending on the company's policies  been on recording the cash/In coming cash flow towards their receivables, the accrual basis  method of accounting reflects things that are not recorded but are anticipated to be received by the company. This method can be extend  into inventory used, real estate purchases, and any other type of transaction that is not immediately finished by the sale.

GAAP does allow for cash basis record keeping, but only if a company starts its bookkeeping that way.

1 comment:

Iiro Kolkkala said...

I agree in your article.Accounting is really hard thing to do even your a professional.Thanks for sharing this short article.Good job.

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