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The paper discusses the two generally permissible methods of keeping track of business income and expenses; the cash flow accounting method and the accrual accounting method. The paper points out that the International Accounting Standards Board (IASB) mandates cash flow methods, however, cash flow accounting is not without its critics. The paper asserts that certain industries may be better suited to one method depending upon the nature of financing or seasonal changes in demand, and while cash flow accounting may be less apt to be influenced by creative accounting techniques, neither method is immune.
From the Paper:"The accrual method is deemed easier for businesses, as with some transactions, it can be difficult to determine when the actual exchange of funds occurs, particularly if the actual monetary transaction involves a complicated exchange ("Cash versus accrual accounting," INC, 2000). But for most organizations, the main significance of the mandated or chosen use of one method over another is for tax purposes. Expenses incurred during one tax year cannot be deducted until they are paid using the cash method, but in the accrual method once the transaction occurs, it is recorded as a deduction for that year's tax statement: "You don't have to wait until you see the money or until you actually pay money out of your checking account," to take the deduction in the accrual method, so an organization does not have to wait until it is actually cash-poorer to record a potentially deductible expense ("Cash versus accrual accounting," INC, 2000).
"The advantage of the cash method is that it gives a truer idea of how much actual cash a business has on hand. Furthermore, it lessens the ambiguity as to whether the actual payment will be made to the business--only when the cash enters or leaves the account can the expense be recorded. What if someone does not pay for the item, for example, even though the actual transaction is recorded, as in the accrual method? This ambiguity is done away with in the cash method, as well lessens the risks of other methods of creative accounting, such as creating fictional future profits or expenses."
Sample of Sources Used:
- "Cash vs. accrual accounting." INC. April 24, 2000. September 4, 2009 at http://www.inc.com/articles/2000/04/19194.html
- Morais, Ana Isabel & Jose Dias Curto. "Accounting quality." Revista Contabilidade & Financas. 19.48: (September/December 2008). September 4, 2009 at http://www.scielo.br/scielo.php?pid=S1519-70772008000300009&script=sci_arttext
- "Will global accounting rules help or hinder accuracy?" Knowledge@Emory. November 15, 2007. September 4, 2009 http://knowledge.emory.edu/article.cfm?articleid=1091
Cite this Term Paper:
Cash Flow vs. Accrual Accounting (2012, January 24) Retrieved July 04, 2022, from https://www.academon.com/term-paper/cash-flow-vs-accrual-accounting-150063/
"Cash Flow vs. Accrual Accounting" 24 January 2012. Web. 04 July. 2022. <https://www.academon.com/term-paper/cash-flow-vs-accrual-accounting-150063/>