The accrual-based system
The accrual-based system is most preferred to the cash based system because it tends to simulate the economic realities of the activities within a business, as opposed to just recording transactions as they take place. This method is mostly used for large enterprises or businesses. It is essential to use the accrual system because it allows for easier planning. It gives room for one to account for revenue and expenses at the right time. In business, for instance, one can come up with a budget for their anticipated costs beforehand. It is also possible to predict sales, as opposed to the cash-based system.
Accrual-based system also allows financial managers to use the company resources appropriately since it gives a more accurate financial picture. Managers can analyze the cost of a product or service to the related industry standards. The expansion of a business can be limited if the company can only account for cash that has already been paid, as opposed to accounting for both cash paid and cash payable. Spending cash that is supposed to be set aside for creditors can also be detrimental to a company.
Additionally, the accrual system also allows useful business analysis since matching expenses and revenue through this method is easy. For example, when one buys a piece of equipment to be used over a given period, say twenty years, for business, the cost will be spread over that span. The cash system does not have that allowance. An analysis can further be done to acquire the average revenue earned from products the equipment produces per year.
As a company grows, it may reach a point where it is not self-sufficient. To survive or expand, it may have to depend on credit. The accrual system allows companies to accurately record and measure credit. This is both credit the company is owed, and credit it owes.
Priya Srivastava, D. M. (2016). Impact of accounting information for management. International Journal of Applied Research, 171-174.