Question

Why do bankers want financial statements before loaning money and the importance of maintaining financial records to prepare the financial statements?

What is the difference between the accrual and the cash basis of accounting for preparing financial statements?

Answer 1

1. The bankers need financial statements to determine the financial and liquidity position of the organization or person to whom it is lending money. The financial records in this case are very important to be maintained and audited as per the prescribed laws. The banks would not lend money without the being certain about the financial position of the opposite party.

2. Accrual basis of accounting is accounting of transactions as they happen irrespective of cash being received or paid. i,e accounting is done even on credit basis (Eg. expenditure recorded without payment)

Cash basis of accounting is accounting of transactions only when there has been an exchange of cash for it. (Eg: accounting expenditure after payment even though paid after 1 year of the contract obligation completion).

Financial statements are prepared in both the basis of accounting and the fact is to be disclosed in the financial statements. Cash basis of accounting is only available for a very few set of persons or organizations. (Eg: doctors clinic where only cash book is maintained)