Difference Between Accrual Accounting And Cash Flow Accounting

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Literary Review by Ebba Isaksson (11386134)

Question 3: “Accrual accounting versus cash-flow accounting.”

Although accrual accounting is most commonly used, it is often argued which of accrual accounting or cash flow accounting is most appropriately used in a firm’s financial statements. The difference between the two methods is when expenses and revenues are realised on the financial statements, thus measuring a firm’s performance differently. This text will argue the advantages and drawbacks of respective accounting method, and further discuss which accounting method provides potential investors with the most relevant and timely financial information. The main difference between accrual accounting and cash flow accounting methods lies in when revenues and expenses are recognised on the financial statements. Accrual accounting is recognising revenue at the point of sale and expenses as they are incurred, even though cash may not have yet been received or paid (Marshall, McManus and Viele, 2017, p. 46). Cash flow accounting is recognising revenue at the point of money being received, and expenses at the point of money being paid (Toma, Carp and Robu, 2015, p. 1046), meaning transactions will not show up on the financial statement until cash has been either received or paid.
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explains the change from former popular cash flow accounting to accrual accounting measures as a gradual process (2015, p. 1046). This was mainly due to the passing from cash-deliveries to commercial credit-deliveries. Toma et al. further argues that in the contemporary economy, most transactions are made through credit payments, making cash flow accounting less relevant. They explain the change to accrual accounting measures as necessary in today’s society in order to provide the users with more timely and accurate financial
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