Question

Imagine that you opened a restaurant in your hometown and you decided to take the knowledge and skills you learned in this class and be your own accountant. Discuss whether you would prefer to keep your accounting records on the cash basis or the accrual basis. As part of the discussion, explain how and why you selected one basis over the other.

Answer 1

Since we do not have knowledge on what was taught in class, so we'll be giving you the insight based on our knowledge.

Well, there is no doubt that I will go with accrual basis of accounting. The reasons are enlisted below:

1. Generally there is a statutory requirement in methods of maintenance of accounting records. And mostly accrual basis is followed over cash basis. Hence by statute we'll have to follow accrual basis.

2. In cash basis it becomes difficult to keep a track record of receivables and debtors. In case we have credit sales(restaurants too can have credit sales), then cash basis will not help us to recognise the revenue timely.

3. Accrual basis helps to maintain a record of our expenses and purchases for which we have not paid. This helps to maintain a good health of business as we can analyse what is our payment cycle and what is our receipts cycle.

4. Lastly it helps us to know that what level of working capital is required to be induced on our business.

Conclusion: Hence the accrual basis is more logical to choose from.