Advantages and Disadvantages to Cash and Accural Accounting Essay

Advantages and Disadvantages to Cash and Accural Accounting Essay

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Cash and Accrual Accounting are two elemental accounting methods that are essential to keep records of the expenses and income of a business (Zarandi, et al., 2013).Therefore throughout this essay I will be discussing the advantages and disadvantages of each method in order to conclude which accounting method is more useful for a business. Cash accounting is more favoured especially for small businesses whereby the income is only counted when the payment is received and the expenses are practically paid whereas the accrual accounting method accounts for revenue when the sale takes place and the expenses are counted when the goods or services are received regardless of whether the receivables are literally received or if the payments are paid (Zarandi, et al., 2013). The accrual accounting method is considered the most favourable for businesses and Zarandi, et al. (2013, p. 245) supports this by summing up their argument that the accrual system is "understandable, reliable, comparable and relevant" and argue that the accrual method has become popular in the UK and the reason is because the information gained from accrual accounting provides a full reflection of the overall impact of 'managerial actions or endeavors on future cash flows than cash flow realizations in any given period.' Hence this clearly shows that the accrual method is more effective as the results from Zarandi, et al. (2013, p. 1) research shows that overall the Accrual method is better for "managing accounting affairs compared to in comparison to the cash accounting method."
On the other hand, (Adrianna and Alexandra, n.d. ) are highly critical of the above view of accrual accounting being more preferred than cash accounting as cash accounting is more favourable...

... middle of paper ...

...nesses in particular small businesses. However, Linda, (2007, p.11) argues that cash accounting "does not match revenues and expenses to the actual period in which the transactions occurred". Therefore this becomes a disadvantage for cash accounting. On the other hand, Linda ( 2007, p.11) claims accrual accounting may be seen as a better alternative to cash basis as this method unlike cash accounting does "provide a better analytical tool because it closely matches revenues and expenses to the actual period in which the transactions occurred". Despite the accrual accounting method being described by Linda ( 2007, p.11) as a "complex double entry system of accounting" it does provide a more accurate image and detailed information on the financial position and performance of a company which is crucial, therefore an advantage as it produces valid and useful reports.

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