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Accrual Basis of Accounting - Essay Example

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The author of this paper "Accrual Basis of Accounting" will explain which basis of accounting and the reasons why that basis of accounting is not desirable for most organizations. The accrual basis of accounting recognizes income when it is earned and expenditures when they are incurred…

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Subject: Finance & Accounting
Type: Essay
Level: Ph.D.
Pages: 1 (250 words)
Downloads: 4
Author: zackary00

Extract of sample "Accrual Basis of Accounting"

Generally accepted accounting principles (GAAP) follow the accrual basis of accounting as a sound method of reporting income, since it matches income with the relevant costs that produced that income. (Larson & Jensen, 2010)

If an organization uses the cash basis method, there is a danger of misleading information about the long-term profitability of the firm. (Fishman) For example, if a firm has an unusual cash collection for a particular month, it might be construed as the firm performing exceptionally well on that month. The truth is, there could have been a very low volume of sales for the period, but credit customers sent their payments in, thus the unusually high volume of cash receipts for the month. If the firm had used the accrual basis of accounting, it would have immediately shown on its financial statements the low sales for the period because it only recognizes revenues when products or services are rendered to customers. For planning purposes, it is therefore not desirable for most organizations to have a cash basis, as it does not give the complete picture of the operations of the company.

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