Question

Many sole proprietorships and small businesses use cash basis accounting; however, accrual basis accounting is the method of accounting most corporations and professionals are required to use by Malaysian Accounting Standards Board (MASB). Explain 4 reasons why corporations are required to use accrual basis accounting compared to cash basis accounting.

Answer 1

Accrual basis accounting is an accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term "accrual" refers to any individual entry recording revenue or expense in the absence of a cash transaction.

Accrual Basis Accounting is better than Cash basis Accounting in several ways,they are:

1)Enhancing Financial Outlook

“Accrual accounting easily allows a picture to the business owner ,that the company is profitable or not, where and how the profit has been arrived, and where the expenditure raises off. It also matches revenues with the expenses that company incurred to produce it fo

2). Upgrade Accuracy

Accrual accounting gives a clear and belivable idea of their resources and financial responsibilities. This serves as a company advantage because according to Inc.com, it allows businesses to properly control the flow of financial activity. Income and debts can be more accurately realize with accrual accounting.

3). Planning for growth

Cash accounting is an" occurence" accounting style, while accrual accounting is done in real time. Accrual accounting makes it reliable for business managers to plan the future,Where they need not have make time for cash to be received to see what their profits are, They can find ways to improve sales or generate more revenue as they spot financial level. This keeps a company progressive, which is crucial to practicability

4). Obtaining Credit

For an expansion, or even to survival stage, most businesses will look and likes to depend on credit. Accrual accounting helps companies to record and measure credit owing as well as owed.

For financial statements prepared in accordance with generally accepted accounting principles, the accrual basis of accounting is required because of the matching principle.

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