Question

Compare cash and accrual-based accounting and which is more appropriate when developing a budget. Provide specific examples of how these two different accounting methods can impact decisions made by managers. Provide advantages and disadvantages of each method.

Answer 1

The cash and accrual based accounting methods are used to make budget. The cash based used to frame the Cash based Budgets where we only considers the actual cash receipts/payments which are previously scheduled . These cash based transactions can be pertains to any previous or future years. No matching of revenues and expenses of year.

On the other hand, the accrual based accounting budgets has the receipts and payments related to one concerned transaction year, normally next financial year to the current year. The receipts and payments of the financial year could be either be paid and payable in the forthcoming years. There is a matching of the financial year’s revenues with the expenses.

Disturbances or negative effect due to these two accounting methods to the managers are:

a) The Sales and expenditures in a year takes place, but the cash collection and requirements could impact the decisions made by managers because it can either provide ample of cash or cash shortage at a given point of time.

b) The accounting method could raise problems for the managers in getting and putting the repeat orders because under cash based budget it is not assessed correctly how much cash payment is due to or from the client. There could be condition that unless full payment is collected or made, there could not be another transaction.

Cash based accounting budget:

Advantages are : 1) Do not worry about what is due.

2) Low work load and fast working.

3) No adjustments are required to be made.

Disadvantages are: a) Always chances of having a emergency payments.

b) no matching of revenues with the expenses of the year.

Accrual based accounting budget:

Advantages are : 1) We can match the year’s revenues and expenses.

2) Separate accounting of the due amounts.

3) All revenues and expenses of a year are collected in the year’s data.

Disadvantages are: a) More work load due to accounting for the dues.

b) many adjustment transactions takes place on the end date of year.

===================