Accounting Method That Measures The Performance Of A Company (Essay Sample)

Accrual Accounting
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By definition accrual accounting is an accounting method that measures the performance of a company by recognizing economic events regardless of whether cash transactions occurs or not. The idea behind this, is that economics events are matched by matching the revenue expense at the time of the occurrence of a transaction rather than when the payment is made. This method give room for the cash inflows to be combined with the future expected cash flows thus giving a more detailed and accurate financial position of a firm. Cash accounting is the opposite of accrual accounting and only recognizes transactions at the point of exchange.
Selling credit and projects that give a firm revenue streams for a long period of time will likely affect the company’s financial position at the point of transaction, hence it makes sense such events be recorded in the financial statements. Accrual accounting is a standard accounting practice for most companies with the exception of small companies. Though this method gives an accurate financial position of a firm, its complex to execute and hence a company will have to incur high expenses to execute it. Apart from accuracy accrual accounting provides a better measure of the profitability of a firm during a specific time period, this is because the results of accrual accounting is an income statement.
For example if a company sell a television set to a customer who decides to pay using a credit card, the cash and the accrual methods will generate different financial statements. The revenue to be generated from the sale of the television will only be reflected in cash account when the money is received. Hence if the payment will mature in one month the revenue might not recognized until the month ends. On the oth...