How does the use of the accrual basis help organizations to better evaluate their performance over time? What protection could financial statements generated under the accrual basis have to a potential donor in the organization?
How does the use of the accrual basis help organizations to better evaluate their performance over time?
Accrual basis financial statements truly report the results of operations because expenses are matched to revenues which result in a better picture of actual expenses of actual revenue. Cash basis, on the other hand, will only report revenues when they are received and expenses when they are paid. There can be a great distortion in the results of operations mostly because of timing differences between receipt of revenue and payment of expenses.
As a result of timing differences under cash basis, it can be almost impossible to evaluate past performance as compared to the current accounting period. Further, it is difficult to forecast future net income using the past as a ...
The 516 word solution explains the benefits of accrual accounts subdivided by the income statement and the balance sheet. For both cases, benefits are categorized by usefulness for inside purposes and for outside users. Examples are presented to further explain the protections for stakeholders in understanding an organization.