Question

Accrual accounting is considered the more conceptually sound method of accounting Explain how it produces a more accurate income figure than Cash Accounting?

Answer 1

Accrual Accounting means that accounting is done on the basis of that the revenues are recorded when earned not received and expenses are recorded when their benefit is received irrespective of cash paid.

On the other hand cash base accounting means the revenues are recorded when received and expenses are recorded when paid.

It produces a more accurate income figure than cash accounting as it follows the Accounting Principle that is "Matching Principle" means that the revenues and expenses are matched to the accounting period in which they are recognised not on the basis of cash paid or received

For E.g A company gets the benefit from a client for $500 in 2017-18 but the cash paid to the client by the company is in 2018-2019 so on the basis of accrual accounting expense is recorded in the year benefit taken i.e 2017-18 whereas in cash base accounting expense is recognised when paid i.e 18-19 so expense for 17-18 is recorded in 18-19 which leads to calculation of wrong income for 17-18

So this tells that accrual method is more sound and helps us in calculation accurate income of accounting period