Question

Let's start the week by exploring the accrual basis of accounting. Why do accountants use this instead of the cash basis of accounting? What are some of the benefits of using accrual accounting?

Please use a different answer than whats on the Chegg database, thank you!

Answer 1

Accrual basis of accounting is mandatory under IFRS. Accrual basis of accounting provides a clear picture in relation to profit earned, asset and liabilities for a given period when compared with cash basis of accounting.

Revenue and expenses are recorded only when cash is received and paid under cash basis of accounting. For example goods are sold in the month of January but cash is received in the month of August, the revenue is recorded when cash is received ie. in the month of August. But under accrual basis of accounting, revenue and expenses are recorded in the month in which the transaction actually took place irrespective of cash received or paid. Continuing the above example, goods sold in January are recorded in the same month irrespective of cash receipt from the sale of goods.

Recording the income and expense in the period in which the transaction took place will provide correct profit or loss for that period. Since the results of a period are properly shown in accrual basis of accounting, it is preferred over cash basis of accounting.