In favour of cash accounting, it is simpler to record transactions just once in the cash book, and period-end adjustments for accruals and prepayments are unnecessary. Also in many jurisdictions taxation authorities may prefer a close connection to cash. However for private sector organisations cash accounting is not considered a true and fair view. Cash is not the same as profit (or surplus of income over expenditure) and the results do not reflect earnings or costs which are due for a period. The time of payment may distort the apparent profit or loss. Accruals accounting requires adjustment for each period to ensure valid comparisons of revenues and expenses. It may also involve subjective judgements, e.g. of depreciation rates. On the plus side, accruals accounting allows consistent comparison of one period to another and distinguishes profit from cash flows.
Choice between accruals and cash accounting
So which method is correct?
For private sector organisations which follow International Accounting Standards, the accruals basis is mandatory.
However many governments including GoB and many private organisations which do not follow IAS, use cash accounting.
Many accountants would argue that cash accounting cannot show a fair view of the organisation’s results.
Accounts are prepared for a number of purposes including stewardship, management, decision making and investment appraisal. Users of accounts include owners, managers, employees, business suppliers and customers, government and the public. Accounts are prepared according to rules and conventions and incorporate a number of concepts of which four (going concern, consistency, prudence and matching) are fundamental. Accounts are limited in the nature of the information they can provide and to gain a full understanding of an organisation it is necessary to supplement them with non-financial information. The cash and accruals bases are both used but can produce very different impressions of the same transactions.