Accounting principle and theory are generally referred to two main accounting methods which include cash accounting and accrual accounting. Cash basis accounting on income and cost is determined by the amount of actual payment for reference and accounting recording mode is simple, easy to master. The use of the accrual basis of accounting is more complicated than it with a main difference of recording timing. This essay will firstly separately discuss related conception and theory of cash and accrual accounting. Following this, it will explain the advantages and disadvantages of those two dealing method. Finally, it will offer two examples to describe manipulating profits in accrual accounting, then one preference selection of two main methods is given in the conclusion part.
2. Two methods for calculating performance of an accounting period
Cash-basis accounting is that cash received or paid for the standard, to record the implementation of income or expenses occurred (Kelly, Tracy, 2010, p. 10). That is to say income and expenses period should be intensively tied to cash behavior of the payment or receipts.
And the accrual accounting of international accounting standards to explain: "according to accrual basis requirements, enterprises should confirm its impact in the transaction when it occurs but not in the receipt and payment of cash and cash equivalents, and they should be credited with their associated the accounting records during the period with financial report to report (Albright, Ingram, 2006, p. 83)." This explains the transaction to be confirmed when items occur, rather than in the received or paid confirmation. The accrual basis of accounting practice on time referring to the main body of economic activities happened and monetary payments is not completely consistent (Hansen, Jones, Lowen, Rich, 2011. p. 110). For example, “accrued expenses are expenses that...