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Accrual Accounting vs. Cash Accounting Essay

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The recording of financial activities in a business is essential in making sure accurate information is provided for decision making. Zafirakis (2005:4) states that "Accrual accounting is the cornerstone of modern accounting procedures." In this essay, the importance of accrual accounting will be considered by looking at how it functions in the Double Entry System and comparing it to cash accounting, another method of gathering financial information. Time and an accurate accounting measurement is what will be considered in determining the importance of accrual accounting.

Double-entry accounting is used to develop accounting data. From this data, we can determine the performance of a business by calculating its profit, revenues - expenses. Juchau et al (2004:F146) states that "double-entry accounting is necessary for the accounting equation to be kept in balance." That is the five types of accounts, Assets, Liabilities, Equity, Revenues and Expenses must equate:

Assets = Liabilities + Equity + Revenues - Expenses, this is the accounting equation. These accounts are recorded in the General Journal as entries and posted to the General Ledgers as `T'-accounts.

Recording of these accounts are governed by Debit and Credit rules. When an asset or expense increases, it is considered a debit, when either of the two accounts decreases, it is considered a credit. Liabilities, equity and revenues can be considered the opposites to assets and expenses in that they form a debit when decreased and a credit when increased. From this, a duality of recording is formed since every event of recording a transaction involves recording one debit and one credit. For example, Famous Zamous, a cookie company sold $1000 worth of cookies on th...


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...ugh the sale was made on the 1st of Jan, the cash measurement of accounting has failed to show any activity on the 1st of Jan. This results in a distorted report of financing operations of Famous Zamous. Similarly, net profit for the month of January in cash accounting would have differed from that of the accrual measurement, being that revenues and expenses recorded are of different balances, cash accounting being that of lacking information.

In conclusion, accrual accounting is the better system as it provides a more accurate account of the operations and performances of a business.

Bibliography:

Juchau R., Flanagan J., Mitchell G., Tibbits G., Ingram R.W., Albright T.L., Baldwin B.A. & Hill J.W. 2004 Accounting information for Decisions Australia: Thomson

Zafirakis, M. 2005 Accounting Handbook Australia: Trinity College Foundations Studies Program



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