There are two main ways in preparing books and financial statements in the accounting world. These two methods are precision and cash. Although there are similarities, there is quite a difference between the two to be the most widespread because of the greater accuracy.
For accountability, accrual accounting is more fairly and more accurate than cash settlement. So what is the accrual accounting? The term comes from the recognition of revenue and expense. This is the basis for revenue and expenses of this type of accounting documents when they accumulate or occur even when there is no money collected. For example, if a business buys a piece of equipment, regardless of whether it is in cash or in an account, there is an overhead bill. On the other hand, if you sell cash or receive cash, revenue is generated. Although this method does not provide a precise account of the current cash position of the company, it provides an accurate picture of the business profit position.
Accrual accounting is in contravention of the fund. This method recognizes revenue and expenses when they are paid or paid. For example, a business will not show up with profit on the item sold until it actually receives payment from the customer. Likewise, you will not incur any expenses or cash cuts until you actually pay the bill. As you can see, this can create serious problems in preparing the financial statements. For example, consider a company that has more debt than receivables in the current period.
By accidentally collecting most of their claims and not paying their bill, they seem to be much more profitable than they actually are. In the next period when they finally pay their cost bill, it will look like a big loss to the company, especially if they do not collect enough money to balance the amounts paid. Based on these examples, it is very easy to see how the cash fund can distort the profit and loss statement and easily mix investors or other stakeholders.
This article presents the basics of two main types of accounting methods. Although there are different methods of recording revenue and expenses, the accrual-based approach proved to be more accurate than cash. The result-accounting method for every business manager gives a much better picture of how the company produces profits and is easy to compare with current spending.
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