Basis Accounting

Use FASB to identify what standard-setters have said as to the superiority of accrual accounting relative to a cash basis. Do you agree with the justification offered for accrual accounting? Explain.

The basic premise of accrual basis accounting is that revenue and expenses are recognized when they are earned. This is the premise that can be seen in the FASB codification document 605-10-25-1. It states in subtopic (a) "Revenue and gains generally are not recognized until realized or realizable." This means that when the business sells its products or services, the revenue will not be recognized until the payment cash or similarly convertible assets are received. Also specifically how the transaction must be accomplished to able to collect the cash or other type of asset. This can be seen in the next area of the codification that references Paragraph 83(b) of FASB Concept Statements No. 5. states that the actual good or service must be actually delivered or substantially accomplished.

Alicia discusses the problems with revenue recognition under certain contractual provisions. These cases the accrual method not the best method, as in these cases there is no specific way to determine the degre of collectability. This can be seen in the codification 605-10-25-4. It states that the installment method or cost recovery methods of accounting should be used for these transactions.

Another point that Alicia states that she can not understand why interest is an operating item and not a financing item on the statement of cash flows. In this case the indirect method of accounting would be applied. The information this topic is addressed in codification 230-10-55, it states that "Thus, it may be possible to determine indirectly cash collected from customers and interest and dividends received using much the same information needed to determine net cash flow from operating activities using the indirect method."

Overall, the accrual basis accounting is the easiest and simplest method of recognizing revenue. The judgement in the case of the FASB is correct, in that the easier method outlined is simpler to define when questions arise. Further when auditors and management look at the presentation, it is the easier method to explain and justify.

Identify which accounting pronouncement specifically observes: "This Statement relies on a basic premise of generally accepted accounting principles that accrual accounting provides more relevant and useful information than does cash basis accounting."

This can be found in the FASB pre-codification standards section. It would be statement 106. This deals with Employers'