Accounting Basis
Accounting Basis
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- From the e-Activity, explain the major advantages and disadvantages inherent in using both the cash and the accrual basis of accounting, and determine the one (1) that you believe provides the most useful financial information to users. Identify at least two (2) types of businesses that would benefit by preparing financial statements using either the cash or accrual basis of accounting. Justify your response.
- Define the generally acceptable accounting principles that justify making adjusting entries, and speculate on the primary impact to investors and creditors if companies did not make adjusting entries until the end of the calendar or fiscal year.
Answer preview
Accrual accounting has some advantages and disadvantages. It is more popular than cash basis accounting since it is more accurate and has more faithful financial statement. This is because it records both revenues and expenses same time. It also produces an accurate gauge of entities performance of any given period of time (Tracy, 2013). On the other hand, accrual basis accounting has some disadvantages. It requires the transaction to be recorded at the time of occurrence. Use of cash basis of accounting is simple and flexible which takes cash flow into consideration. In this case income is not taxed unless it is received. However it has some disadvantage since there is no control of accounts receivable, payable in long term basis. Cash basis accounting is not that good since it gives individual very shallow information regrinding the business. ……………..
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