Accounting and Finance: Essay on Accrual Basis

Topics: Generally Accepted Accounting Principles, Income statement, Revenue Pages: 3 (1087 words) Published: December 16, 2010
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 inventory assets. The reason for this is that the basis recognises, revenue when earned regardless of whether or not money has changed hands, and expenses when incurred. Revenue is earned when goods are delivered or services are provided. The recognition of Expense matches expenses with related income, and this is under the role of the Matching Principle.

One of the major advantage of using accrual basis is that, it reviews a more accurate and complete picture of the business’s financial position over a long-term period. The transactions will only be recorded in the related financial year, when they actually take place. A company will have accrued expenses, which are expenses due paying in the present financial year, the payment is settled in the next financial year. Although the payment is settled in the next year, the expense is still related to the present year so it will be included in the present year’s income statement under expenses. There can also be prepaid expenses, they are expenses that have already been paid, but services are due to be received in the future. according to the accrual basis, expenses are recognised in the related year when it is incurred. As a result, this transaction will be recognised as an...
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