Accounting and Finance: Essay on Accrual Basis

1097 WordsDec 26, 20105 Pages
AC300:Financial Accounting I - Compulsory essay due 15th November Discuss the advantages and disadvantages of financial statements prepared on an accrual basis The financial statement is a financial document used to indicate the financial position of a business at a particular moment in time. A business’s financial position can be analysed into three main areas: Profitability, liquidity and stewardships. The statement is prepared at the end of each financial year using accounting basis. The Accrual accounting basis is one of them, it is perhaps the most commonly used approach to keep up with revenues and expenses in the preparation of financial statement . It is suitable to use by organisations that have business activities involving…show more content…
This may be due a prepaid revenue at a specific timing when payment to creditors (Trade payables) is made before purchased good arrived. The situation may also happen when the business has not yet received receipts from debtors (Trade receivables), but the sales is actually recorded and included in the income statement. Therefore the difference in timing may contribute to problems in the cash-flow in the organisation. In conclusion, the accrual accounting basis is widely used in the preparation of financial statement because it is more objective and realistic to recognise revenue and expenses when they are incurred, even though no cash has actually changed hand. Therefore the profitability of a business is outstood very clearly in the financial statement. However, accrual basis is complex, and the cash at bank balance does not reflect to net revenue. In credit sales transaction, the event of delivery of goods or services, does not occur at the same time as the invoice receipt from debtors. Doubtlessly, it is a good measure for the profitability, but for cash-flow and liquidity, it may not be reliably useful. An alternative method of accounting basis, the cash basis, can be used in preparing the financial statement. The cash basis recognises revenues and expenses according to the real-time cash flow. This simply means that the transactions are recorded when cash
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