Choice of the Accounting Methods - Essay Example

Businesses should therefore choose the most suitable accounting method. This paper prescribes the accrual basis of accounting over the cash basis.

Cash versus Accrual Basis
There are several pluses of using the accrual accounting method over the cash method. While the accrual method recognizes income and expenses in the immediate period, the cash basis recognizes income and expenses in relation to real-time cash flow. In fact, in the case of cash accounting, income is recorded when funds are received while expenses are recorded when paid rather than as they actually occur.

The major advantage of accrual accounting over cash accounting is that it lays great weight on the period in which expenses and incomes apply, whether money has changed hand or not (McQuaig et al). In this regard, the accrual system records the period in which money is earned instead of when payment is made as in the case of cash basis of accounting. That is, while payment may be made long after a job is completed, the accrual basis of accounting would recognize the period in which the work was done. The accrual method thus offers a clearer and more accurate picture of the long-term performance of a business compared to the cash basis (Palmer et al., 1999). The accrual method is also suggested for businesses that deal with inventory, be they small retailers to big manufacturers. Read More