Question

  Differentiate between cash basis accounting and accrual basis accounting. Why do more businesses use accrual basis? What are some of the accounting principles and concepts that influence the four financial statements all business organization create each financial period?

Answer 1

Differentiate between cash basis accounting and accrual basis accounting. Why do more businesses use accrual basis? What are some of the accounting principles and concepts that influence the four financial statements all business organization create each financial period?
The cash basis of accounting recognizes the expenses when they are paid and revenues when cash will be received. This method would not be recognizing the accounts payable or accounts receivable. On the other hand under the accrual basis, revenues and expenses would be recorded when they are earned, regardless of when the cash is actually been paid or received.
The accrual basis approach is more commonly used in business in comparison to the cash method. The accrual basis depicts a more accurate picture of financial health of a business entity as it includes all revenues and expenses, unpaid or paid. It reflects an accurate and realistic idea of income and expenses during specifi time frame, therefore providing a long-term picture of the company that cash accounting would lack.
Some of the accounting principles and and concepts that impacts the four financial statements all business entities are:
-- Going concern concept: It states that business company will continue to exist long enough to carry out its targets and objectives and would not liquidate in the foreseeable future.
-- Dual aspect concept: It is based on the assumption that every transaction will have a impact thus reflecting that the two accounts in their respective opposite sides
-- Separate entity concept: For legal purposes, a sole proprietorship and the owner would be categorised to be one entity, but the accounting purposes will be considered to be two separate entities
-- Matching concept: This accounting principle states that business should use the accrual basis of accounting, thus expenses need to be matched with revenues
-- Money measurement concept: The actvities in an economy is measured in money, and only transactions that can be expressed in money need to be recorded.