Question

What is accrual accounting and why is it the preferred method for most organisations

Answer 1

Accrual method of accounting is the method of accounting where receivables are reported as assets as and when they are earned. Revenues are reported as and when they are earned, payables are reported as liabilities as andd when they are incurred. The expenses are also reported when they are best matched revenues or when they are used up. Net income is based on revenues earned and expenses incurred, than on cash receipt and cash disbursements. Under Accrual Method of Accounting, the balance sheet is more complete as far as reporting of assets, liabilities and the amounts of stockholders equity. Also it is required by GAAP.

Accrual Method of accounting is the most preferred method for most of the organisations because:

i. It is more complete reporting of company's assets, liabilities and stockholders equity at the end of the accounting period than cash basis accounting.

ii. Also it is the more realistic reporting of a company's revenues, expenses and the net income for a specific time interval. Whereas cash basis of accounting is most likely to violate the matching principle of accounting.