Pros And Cons Of Accrual Accounting

22nd November, 2015
Laura Schim van der Loeff
Academic and Study Skills
Pros and cons of “cash-flow accounting” and those of “accrual accounting” Yuting Cui
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In an entity, financial accounting, or bookkeeping is the tool used to keep track on financial activities. Users, for example: managers, stockholders, etc. use the result of financial statements to justify behaviors of the entity and make efficient decisions accounting to the data provided. With different basis, companies have various methods to do bookkeeping. Two methods mentioned in this paper are cash-flow basis and accrual basis accounting. Although both methods are applied to record accounting transactions, they vary two major aspects: timing of recognition and matching principles.

One point needs to be mentioned here is the type, or objectives, of this entity. For example, comparing to a for-profit organization, a non-for- profit organization has less cash, less revenues and expenses, and less trade incur during its financial performance. Because no profitability is involved in this entity, it requires less work for managers in non-for-profit organizations to do cash-flow accounting rather than accrual accounting so that they can manage balance in hands, and do not need to take estimated future earnings, or profits, into account. In this paper, pros and cons of two methods are considered mainly within organizations which aim to maximize their profits. In comparison, advantages of cash based accounting are costs of accrual based for some extent. Firstly, cash-flow accounting requires less skills to comprehend for both bookkeepers and readers of the accounting book. In another words, accrual accounting is a systematic method, it has certain rules and regulations to perform. Thus accrual accounting is more complex than cash-flow to understand(Andy Wynne, 2004, p. 9). While applying cash based accounting, it is intuitive for managers to understand the firm’s financial performance when they see how much “cash” they actually have in bank account and also simple for accountant to record inflows and outflows. If accrual accounting is considered as an abstract idea, then cash-flow accounting is concrete since it represents numbers only when they really exist. Secondly, cash based accounting keeps better track on firms’ accounts than accrual accounting does. In the situation when after adaption of the valuation, the value does not equal to the book value, the benefits of cash-flow accounting is revealed because cash methods record transactions only until the payment has really occurred (Penman, 2001, p.688). Accrual