Between the cash basis and accrual basis, which method provides a better picture of the overall...
Between the cash basis and accrual basis, which method provides a better picture of the overall profitability of a company?
Homework Answers
Accrual method provides a better picture of the overall profitability because of the following reasons:
- Accrual method of accounting accounts for all transactions for the current period whether on cash or credit.
- it accounts for expenses incurred whether cash for the same has been paid or not. Also it accounts for revenues earned whether received in cash or not
- thus accrual method applies the matching principal whereby all the current period expenses are matched against current year revenues.
- therefore we have the complete and true information of current year expenses as well as revenues. Now we can derive the true profit by subtracting expenses from revenues.
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Between the cash basis and accrual basis, which method provides
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