Question

Why do accountants use the accrual-basis method instead of the cash basis method of accounting? What are some of the benefits of using accrual accounting?

Answer 1

Required:

Accrual Basis: The transaction and revenue are recorded when earned and expenses are recorded when incurred.

Cash Basis: The transaction and revenue are recorded when cash is received from customers. Expenses are recorded when cash is paid to suppliers.

A reason for the accrual basis method of accounting popularity is that it levels out earnings overtime since it records all revenue and expenses as they’re generated instead of being recorded sporadically like they are under the cash basis method.

Benefits of using accrual accounting:

• Accrual is the most popular accounting method because it delivers a more accurate representation of actual profit compared to cash.
• The method follows the matching principle, which says that revenues and expenses should be recognized in the same period.
• Including accounts receivables and payables allows for a more accurate picture of the long-term profitability of a company.
• Future expenses and revenues are taken into account with accrual which makes for simple business planning.
• Since expenses are accounted for once they are realized accruals give companies the ability to deduct some expenses on tax returns before actually paying for them.