They have the same purposes of using them in business areas; to record the events going on in the business such as revenues, expenses, cash flows, sales and etc... They have been used by office holders, government employees, directors, shareholders, managers; in a word, anywhere cash flows taking places. Of course they have differences between them. Accrual based accounting has more alternatives and can be used in many businesses because it gives more accurate calculations and a better view of the business but it is better to use in big businesses. This is because the cash based accounting is easier to use and much cheaper so it would be waste to use accrual if the business is fine with cash based accounting.
From another point of view, accrual accounting can be seen as the main action for the criteria for the recognition of the revenue and expense which has got two key conventions: the realization and the matching process. These matching principles are fundamental to the determination and identification of the point in time where the profits are deemed to occur. They do not have any natural law concepts or anything. They are both based on common sense and accepted as it is in accountancy. A really basic example to this belief of conduct is ‘stock’ where the goods are not being sold when they have been bought and there is normally no certain time to do that. Stock has been incurred in the expectation of future revenue. Any earning is been recorded regardless of payment time and the expense is recognized when the payment is actually done by the matching principle. Using accrual based may cause arise in accrued expenses. So, to improve businesses actions and avoid expense arises it may need to comprise the value of services received, such as gas and electricity, and the invoices for expenses which are remaining to be paid at the end of the accounting year. For services received it needs to make estimates which are called accrued expenses because the bills (invoices) have not been received at the end of the accounting year. (Colin Rickwood, Andrew Thomas, 1992)
Cash based accounting would not work with stock because it does not recognise any promises or expectations. This is a really important disadvantage for the business because it takes place when the money has been paid and received regardless of future expectations. Indeed, cash based accounting is much cheaper to maintain rather than accrual but most of today’s businesses do not want to use the cash based. One of the reasons for that is because it is limited. I mean if you have a small business and do not have any customers and returns then it is ideal for you, but most of the businesses want to widen their opportunities because they want to earn more and more, therefore, they prefer accrual. Also with accrual there is less chance of making mistakes because of its features.
Cash based accounting has been used by government entities very often although they deal with trillions of money. So, we can question why governments’ still uses cash based then. Well, not everything in the world applies to common sense because if it was applying then there would not be anything which is going wrong. In a few words, then, it is certain that governments’ are trying to switch from cash based to accrual based. (Money instructor )
In my opinion, they are both good ways of accounting methods depending on which business you want to use it for. Recording to my researches and discussions most of the businesses would have better view of the business with accrued based accounting in most of the situations. It is a lot easier to improve the business with estimates and predictions without the limitations that cash based accounting gives. We know estimates are not always correct but it is always better to choose the one which has more alternatives and, as above, accrual has more in most of the conditions.
BIBLIOGRAPHY
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Money instructor, available at: ,2008
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All business available at: , 2008
- Colin Rickwood, Andrew Thomas, 1992. “An Introduction to Financial Accounting”, England: Mc Graw Hill
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Richard Lewis Ian Gillespie, 1941.” Foundation in Accounting”, 2nd ed., Singapore
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I.R. Edwards, H.J.Mellett, 1989. ”Introduction to Accounting”, 3rd ed., London