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It has to be accural basis because...
Under the accrual basis of accounting, revenues are reported on the income statement when they are earned. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.For example, if I begin an accounting service in December and provide $10,000 of accounting services in December, but don't receive any of the money from the clients until January, there will be a difference in the income statements for December and January under the accrual and cash bases of accounting. Under the accrual basis, my income statements will show $10,000 of revenues in December and none of those services will be reported as revenues in January. Under the cash basis, my December income statement will show no revenues. Instead, the December services will be reported as January revenues under the cash method.There will be a difference on the balance sheet, too. Under the accrual basis, the December balance sheet will report accounts receivable of $10,000 and the estimated true profit will be added to owner's equity or retained earnings. Under the cash basis, the $10,000 of accounts receivable will not be reported as an asset, and the true profit will not be included in owner's equity or retained earnings.To illustrate a difference in expenses, we will assume that the heat and light expense that I used in my accounting service is metered by the utility on the last day of the month. The utilities that I used in December will appear on a bill that I receive in January and will pay on February1. Under the accrual basis of accounting, the utilities that I used in December will be estimated and will be reported as an expense and a liability on the December financial statements. Under the cash basis of accounting, the utilities used in December will be recorded as an expense on February1, when the utility bills are paid.For financial statements prepared in accordance with generally accepted accounting principles, the accrual method is required because of the matching principle.
Accrual accounting depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period.
Each one has it's purpose of use. accrual basis is more common use in trading business. cash basis use for very small business (one owner mostly), it uses for tax and zakat purpose too.
Each of two methods have their benefits. Sometimes accountant have no choice which one to use. In my case I use both methods at the same time, as according to my company policy I should use accrual basis, but according to local tax purposes I have to use cash basis. So for tax calculations I use cash basis, and for IFRS reporting-accrual basis.
HOW CAN YOU DEFINED THAT OPINION... IS IT TRUE..
Accrual basis is the right approach according to the accounting standard but if you have any experience of a private owned company. or specially here in Arab country. They ask for (hisab al baddu) "bedouin accountancy". it means how much getting out of my pocket and how much getting in my pocket..So cash basis reports are true picture for them. and everything else is hocus pocus. :)
Mostly compines are following Accrual base of accounting. So I am also giving my vote to "Accrual base accounting"
Accrual, as this is the most prudent way of looking into things.
When you can choose either method? Most small businesses (with sales of less than $5 million per year) are free to adopt either accounting method.
When you must use the accrual method? You must use the accrual method if:
Your business has sales of more than $5 million per year, or
Your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year. Inventory includes any merchandise you sell, as well as supplies that will physically become part of an item intended for sale.
Whichever method you use, it's important to realize that either one gives you only a partial picture of the financial status of your business.
Advantages and disadvantages of the accrual method:
While the accrual method shows the ebb and flow of business income and debts more accurately, it may leave you in the dark as to what cash reserves are available, which could result in a serious cash flow problem. For instance, your income ledger may show thousands of dollars in sales, while in reality your bank account is empty because your customers haven't paid you yet.
Advantages and disadvantages of the cash method:
And though the cash method provides a more accurate picture of how much actual cash your business has, it may offer a misleading picture of longer-term profitability. Under the cash method, for instance, your books may show one month to be spectacularly profitable, when actually sales have been slow and, by coincidence, a lot of credit customers paid their bills in that month.
The significance of accrual-based accounting is more felt by bigger organizations as it shows that true results or performance of the business in a certain period of time. Hence it would be useful in generating more reliable management reports such as trend analysis.
