Question

When is cash-basis accounting acceptable? When is accrual accounting better?

Answer 1

1) (A) Cash basis accounting is acceptable for small business , where only cash transactions are taking place( no non cash transactions are taking place).

(B) For professionals like doctors, CA's , lawyers or freelancers , cash basis of accounting is useful, because their fees earnings are only in cash and they have very limited expertise to maintain their books of accounts. Cash basis accounting doesn't not need any analytical skills to main books of accounts ,thus it is acceptable by themselves.

2) (A) Accrual basis of accounting is acceptable for medium and large business houses, because generally, such business firms are dealing with cash and non cash transactions . Accrual basis of accounting considers both cash and non cash transactions to prepare financial reports .

(B) To calculate accurate amount of profit and loss , business firms always accept accrual basis of accounting , because it follows matching principle. Thus , Adjusting entries are made before calculating net profit or net loss under accrual basis of accounting . Which provide more accurate and authenticated profitability and financial position of the business.

(3) Companies act of different countries are only accept accrual basis of accounting for legal documentation and publication of accounting reports. Thus most of the corporates always accept accrual basis of accounting for legal proceedings and meeting with regulatory obligations of the authorities.

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