Cash Accounting Essay
explanatory Essay
1206 words
On 11th September 2014 US lawmakers have sent a letter in which they have urged the House of Representatives to preserve cash-flow accounting method. The legislators have stated that the shift towards accrual accounting could be detrimental to businesses that have developed their business strategies on cash basis for years. Their argument in defence of cash accounting was that it allows a firm to have more disposable income at a time, increasing growth possibilities for small businesses. Moreover, being less complex, the method requires less funds to be spent on accounting processes. On the other hand, Fayez Choudhury suggested that government public sector’s cash accounting does not represent the true economic health of the government by …show more content…
In this essay, the author
- Explains that accrual accounting results in more precise projections of company’s financial situation than the information on present cash recognitions.
- Explains the drawback of accrual accounting, which is the ability of a company's management to distort the facts by manipulating information presented in accruals.
- Explains that both accrual method and cash-basis principle have their flaws, citing bowen et al.
- Explains that us lawmakers have urged the house of representatives to preserve cash-flow accounting method. they argue that accrual accounting allows a firm to have more disposable income, increasing growth possibilities for small businesses.
- Explains that accrual accounting reflects value relevant instances better than cash-basis accounting over longer periods of time.
What has to be remembered is that accrual principle is said to be more complete by containing elements of cash accounting (Toma et al., 2015, p. 1050). In her research, Julie Cotter, found out that accrual accounting reflects value relevant instances better than cash flow accounting over longer periods of time. Her argument was that in the short periods accruals are mostly useful due to their cash-basis components, and the importance of accruals increases with time (Cotter, 1996, p. 149). On the other hand, Dechow stated that as the time span is lengthened, the ability of measuring the performance correctly using the cash-basis method improves relative to accrual accounting (Dechow, 1994, p. 35). She went even further claiming that when a firm has more volatile activities it could suffer from cash flow method inefficiency.
What is more, the author wrote that in the companies with long operating cycles cash flow accounting would be a relatively poor measure of performance in contrast to accrual accounting (Dechow, 1994, p. 7). This research, combined with the statement about accrual method complexity, supports the claim of Professor Feleaga who said “cash accounting has overpassed the accrual accounting. Moreover, nowadays, small enterprises and most of the private businesses use, under different forms, the cash accounting” (as cited in Toma et al., 2015, p.
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1324 wordsRead More