Question

1：How did accrual accounting improve the financial information provided by the GL and financial statements? What have accrual entries made possible in the accounting discipline?

2：A BS must balance (meaning assets=liabs+shareholder's equity) or it is not to be trusted and not relevant. The word "balance" in a BS is very meaningful. What does it mean to the user of a BS if the financial statement is not in balance? Why would a CFO, Controller or Treasurer reject any BS that does not balance?

Answer 1

Ans. 1 Accrual means "a charge for work that has been done but not yet invoiced, for which provision is made at the end of a financial period", as per dictionary. Thus,it lets incorporate the actual revenue whether realized or not to be accounted for in the GL and Financial Statements. So. even if money has not been received but has been earned by a business same can be accounted for thus this has ensured that a better and clearer picture w.r.t. a Business Financial health can come in picture

Ans 2 A Balance Sheet is made on a date. Thus, it also means the balances of Assets, Liabilities and Owner's Equity for a particular date. Similarly, a Balance Sheet is based on Accounting Equation and since double entry system always has a two fold effect on the equation in the form of an equal increase/decrease on both sides of equation or an increase and same amount decrease on the same side of equation, this always keeping equation in balance. That is Assets always equal to sum of Liabilities and Shareholder's Equity.

If a Balnce SHeet does not match then the two fold effect has not been properly considered for a transaction(s). Which means the financial position of a Business is not clear and cannot be used for decision making etc. Thus, it cannot be used by any user including CFO, Controller et al.