The disadvantages of accrual accounting

Written by sheila shanker
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Accrual-basis accounting matches revenue and expenses as they happen, not when money changes hands. Accrual is the official basis of accounting in the U.S, following generally accepted accounting principles (GAAP). Under the accrual methodology, you will see accounts payable and receivable in the financial statements, along with revenue and expenses, unrelated to when cash was received or paid out. There are advantages and disadvantages to this type of accounting.

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Financial Statements

The way accrual methodology recognises income and expenses confuses many users of financial statements. Many readers don't have the background or the education to know how to read accrual basis financial statements -- they can make wrong assumptions or decisions. Readers may see a gross income of £650 and may assume that the business received £650 in cash from customers. That may not be the case -- revenue could be all tied in receivables. Many users may need supplementary information and individual explanations to properly understand an accrual-based financial statement.

Time Requirements

Accountants using the accrual basis of accounting often need time to properly allocate revenue and expenses and make journal entries for expenses not yet paid and revenues not yet received. Typical accrual financial statements have provisions for deferred revenue (cash received, but services not yet performed) and accrued expenses (expenses that have occurred but not yet paid. Usually payroll is accrued at period-end). Another process accountants go through is assets' depreciation and amortisation calculation and posting.

Inflexibility

Compared to cash-basis accounting, the accrual basis is less flexible in the recognition of income and expenses, especially when dealing with taxes. With cash basis, business owners can control when they receive payments or pay bills, giving them more flexibility about their tax liability. This is generally not available under the accrual basis of accounting.

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