Question 33Q - Intermediate Accounting (Kieso)

Question

Generally accepted accounting principles usually require the use of accrual accounting to “fairly present” income. If the cash receipts and disbursements method of accounting will “clearly reflect” taxable income, why does this method not usually also “fairly present” income?

Step-by-Step Solution

Answer

The cash method does not consider the credit perception linked with financial information; hence does not present income fairly. 

Meaning of Accounting Principles

Accounting principles are the milestones that facilitate the business entity to accurately record and maintain its financial information. Such principles contain a set of general rules and basic guidelines. 

Fairly presentation of income

If a business entity adopts the cash method for reporting its income, it will not reflect the accurate outcomes compared to the accrual method. 

The accrual method considers both cash and credit perspectives associated with business transactions. The cash method only records a transaction when cash is received or paid. 

The accrual method provides income fairly because it reports the transactions irrespective of receipt and payment of cash.