Question

Why is accrual basis accounting superior to cash basis accounting?

Answer 1

Accounting main purpose is to determine profit earned or loss incurred by a business in a period of time.There are two basis of accounting to evaluate such purpose Accrual basis and cash basis accounting.

1. Cash basis accounting- It is a simple basis of accounting .Such basis of accounting is when transactions are recorded when cash are transacted whether recieved or paid.It is also known as cash method of accounting.it is more suitable for those organizations where most transactions are done on cash basis like small business owners.

2.. Accrual basis accounting- It is more scientific compared to cash basis of accounting.In this basis of accounting transactions are recorded when it is earned or accrued even if the cash is not recieved.For example purchase on credit .It is more complex basis of accounting.

Accrual basis accounting superior to cash basis accounting because it provides a realistic idea of revenue and expenses within an organization compare to cash basis . Accrual basis accounting records both nature of transactions cash and credit whereas cash basis only records cash transactions. Accrual basis ascertain correct profit or loss compare to cash basis,cash basis is that it may reflect false financial position of company as it only consider cash. Accrual basis is more realiable and accepted by internal as well as external users also like investors,customers,employees etc because it gives clear image of company's performance.Another reason for accepting Accrual basis is that this is the only accounting method acceptable by GAAP (Generally accepted accounting principles), GAAP does not allow companies to use the cash basis.

I HOPE THIS WILL HELP YOU!!!