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Accrual and Cash Basis Accounting: Comparative Analysis

Financial reporting of an organization depends upon the accounting methods it uses. The most common approach, taken by many leading companies is accrual accounting. It is based on the premise that revenues should be recorded and recognized when the product has been delivered to the customer, and when the collectability of the revenue is assured (Needles et al, 108). Thus, the company does not have to receive cash or check in order to recognize revenue. The actual transaction, itself, may occur after a certain period of time, for instance, a year but the company records it at the moment when the agreement has been made. Expenses are also recognized, when the company knows that it will have to spend a sum of money, not at the moment when this money is spent. In contrast, cash basis accounting relies on the idea that revenues and expenses should be recognized only when cash is received or paid, and not when there is possibility that the company may receive cash (Needles, et al 106).

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Accrual accounting is more suitable for the needs of large corporations such as AT&T because they may receive payment for their services only after a long period of time. In this case, cash basis accounting would not be acceptable, as it will not be able to show financial or operational growth of the organization. Moreover, cash basis accounting does not provide any information about the company’s equities and liabilities, and therefore, it is not very suitable for the needs of investors. Overall, cash basis accounting is more applicable for very small businesses, in which the time of agreement and the time of transaction coincide.

Reference

Needles Belverd, Powers Marian, & Crosson Susan. Principles of Accounting. NY: Cengage Learning. 2007. Print.

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StudyCorgi. 2022. "Accrual and Cash Basis Accounting: Comparative Analysis." April 11, 2022. https://studycorgi.com/accrual-and-cash-basis-accounting-comparative-analysis/.

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StudyCorgi. (2022) 'Accrual and Cash Basis Accounting: Comparative Analysis'. 11 April.

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