Question

Will the imposition of a particular accounting method have implications for the ability of the organisation to efficiently provide information about its performance

Answer 1

Accounting methods are the basic rules and guidelines under which organizations should maintain their financial records and prepare their financial reports. Mainly there are two accounting methods used for maintaining books and records: the cash basis and the accrual basis.

CASH BASIS

It refers to the recognition of income and expenses in accordance with the real-time cash inflow and outflow of the organization. Income is recognised on receipt of cash, rather than when it is actually earned; similarly, expenses are recorded when they are paid, rather than when they are actually incurred.

ACCRUAL BASIS

It refers to the recognition of both income and expenses as and when they are earned or incurred, regardless of cash flow to the organisation . Under this method, Income is recorded when it is earned rather than when amount is actually received; similarly expenses are debited when they are incurred rather than when payment is done.

Under generally accepted accounting principles (GAAP), for all businesses that maintains inventories, the accrual basis of accounting is required.

A business that opts to use the accrual method of accounting must use it consistently for all financial reporting purposes.

Where, cash basis is most simpler method of accounting, It provides accurate picture of cashflow however, at the same time it also creates a mismatch of expenses and revenues at times

Thus, the imposition of a particular accounting method may not have implications regards the ability of the organisation to efficiently provide information about its performance, however some accounting standards specifically requires the organization to follow a particular accounting method in order to obtain consistencies in industrial accounting and book-keeping.