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Accrual Accounting Enhances

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Chiappetta, Larson, Wild, Fundamental Accounting Principles, 18th Ed., McGraw-Hill 2007, Original work published 1976). (Wild, 2007)

Discuss how accrual accounting enhances the usefulness of financial statements.

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Accrual accounting which enhances the usefulness of Financial statements is discussed.

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Most of the business enterprises use accrual basis of accounting. In accrual accounting revenue is recognized when it is actually earned whether actually received or not. Expenses are recoded when service is actually performed whether cash is paid or not. In other words revenues are recognized and expenses recorded when they are recognized or incurred in the related accounting period.

Under cash basis of accounting revenues are recognized when cash is actually paid and expenses recorded when cash is actually paid. Thus in cash basis of accounting revenue recognition principal and matching principle are ignored .Cash basis of accounting departs from Generally accepted accounting principles. The following points will clarify how accrual accounting will enhance the usefulness of financial statements.

1 Revenue recognition: when a customer is billed for services it is earned revenue on accrual basis. So in our usual system of accrual accounting we will have to record and recognize the related income of service revenue and charge the amount to customers. In contrast to this revenue will not be ...

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