Question

 

a. Why do major companies use accrual accounting?
b. Do you think that the owner of the food stand on 45th and Fifth Avenue used accrual accounting or the other type of accounting?
c. What is the other type of accounting?

Answer 1

Answer a)

The Accrual accounting system gives a true picture of a particular period of companies financial resources and performance. Accrual system is allocating income and expenses for a particular period and adjusted income and expenses of future and past to derive the same year correct income. It helps other stakeholders to understand financial performance. Accrual accounting is also used for tax purposes in most countries. The Accrual system provides correct and reliable performance. That is the reason why most companies use accrual accounting system.

Answer b)

Generally small business does not have knowledge of the accrual system, and even they can afford an accountant to maintain the system, that is why they use Cash system.

Accrual system used by the medium and large enterprise as they have a huge number of transactions and they can have a team record and manage the transaction whereas small vender can't.

Food stand on the 45th floor is not able to afford accrual due to lack of knowledge and competence.so they use the Cash accounting system.   

Answer c)

The most used accounting system is Accrual System, however, there are other famous too

1- Accrual System: that records revenues and expenses when they are incurred, regardless of when cash is exchanged.

2- Cash System: is an accounting method in which payment receipts are recorded during the period they are received, and expenses are recorded in the period in which they are actually paid

3- Hybrid System (Combination of 1+2) Both are used as per the company direction by arrange the assets and liability and income and expense.