Question

1. What information do accrual-basis financial statements provide that cash basis statements do not? Can Corporations choose between the cash and accrual basis of accounting for financial reporting purposes? Why or why not? 2. Why is the account dividends declared not closed into income summary along with expense accounts?

Answer 1

1) The accrual based financial statement provides information regarding actual sales and actual expenses of a period irrespective of the actual cash received or paid regarding those. The corporations have to prepare accounts on the accrual basis as the GAAP do not allow the financial statements to be prepared on Cash basis.

2) The dividends declared are not included in the expenses accounts under the income summary because dividends are the distribution of profits and not the expense. The dividends are deducted out of the Retained Earnings. Expenses are reduced of the Revenues of the period to have profit or loss of the period, whereas the dividends are paid of the profits whether belonging to past or current year.