Accrual vs. Cash Accounting Essay

Nowadays, the variety of accounting methods can be uses, but, as a rule, cash-basis accounting and accrual-basis accounting are the most widely spread. Basically, many politicians tend to choose cash-basis accounting, instead of accrual, but this rather indicates to their conservatism than to the logical and reasonable choice they make. In fact, cash-basis accounting can hardly be applied effectively at large scale, especially on the level of the state. In actuality, the higher effectiveness of accrual-basis accounting seems to be beyond doubts.

In this respect, it is possible to refer to the experience of large companies which operate nationwide or which enter international market. It is not a secret that they chose accrual-basis accounting that may be viewed as evidence of its higher effectiveness compared to cash-basis accounting. However, it is worth mentioning the fact that the choice in favor of either cash-basis accounting or accrual-basis accounting highly depends on the size of the capital, transactions, etc. In other words, the larger the company, or state budget, for instance, is the more logical is the choice of accrual-basis accounting.

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Basically, cash-basis accounting is a method of bookkeeping that records financial events based on cash flow and cash position. Consequently, revenue is recognized when cash is received and expense is recognized when cash is paid. Obviously, this method of accounting seems to be quite simple and logical and this is why many politicians tend to choose it. In addition, cash-basis accounting permits to follow cash flow strictly that create an impression of strict control over revenues and expenses of the state budget, for instance.

However, in actuality, cash-basis accounting is not really effective and, what is more important, specialists (Heilbroner and Milberg, 2000, 271) estimate that it can hardly give a true and fair view on the financial performance, especially in a long-run. In this respect, accrual-basis accounting seems to be more preferable because it has a number of advantages compared to cash-basis accounting. Firstly, accrual accounting records financial events based on economic activity rather than financial activity. Obviously, in terms of a state this may be viewed as a significant advantage because the economic life of a country cannot depend on the financial activity solely, instead, a country has a complicated economic system that involves various activities and cash payments, which are the basis of cash accounting, cannot always reflect the true situation. In contrast, accrual accounting guarantees that revenue is recorded when it is earned and realized, regardless when the actual payment is received. Expenses are matched in the similar way. As a result, accrual accounting provides more precise information on the current situation, while cash-basis accounting defers all credit transactions to a later date.

Obviously, accrual accounting is more complicated compared to cash accounting and naturally evokes apprehensions of politicians concerning possible errors or even frauds. However, the contemporary information technologies and the use of modern software minimizes the risk of mistake and makes the use of accrual accounting not only more effective but also cheaper. Thus, in spite of the complexity of accrual accounting this method is more preferable to use at the state scale.

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