Written Exercise E3 -2 Page |1
Running Head: WRITTEN EXERCISE E3-2
Written Exercise E3-2
University of Phoenix
Andrea Williams-Epting
Christian Rosales
Devin Zitta
Shelly Tucker
ACC/281
Scott Kersh
August 29, 2011
Written Exercise E3 -2 Page |2
Exercise E3-2
a)
What is the difference between accrual-basis accounting and cash-basis accounting?
Accrual-basis accounting recognizes revenue and expenses in the period in which they occur.
Cash-basis accounting recognizes revenue when it is received and expenses when they are paid.
b)
Why would politicians prefer the cash basis over the accrual basis?
Politicians prefer the cash basis over the accrual basis because when reporting the actual
expenses that are being paid, the cash basis shows an amount less than the actual amount for
the period in which the reporting occurs. This reduces the amount of the deficit that is provided
to the public. It can also make it appear as though the governments operations have reduced
expenses for a particular period when if reported under the accrual basis, the expenses would
be higher. For instance, for the first current fiscal year, the government may show revenue to
be $2 billion dollars, expenses to be $1.5 billion, but only because the expense of $5 billion
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dollars of foreign aid has not been recorded for the fiscal year since it has not been actually paid
yet. This is misleading because it doesn’t show the actual expenses incurred for the fiscal year.
Politicians want the public to see numbers that are in their favor of operations. If the accrual
basis were used, then the net income would be less than with the cash basis due to time of
reporting expenditures.
c) Write a letter to your senator explaining why the federal government should adopt the
accrual basis of accounting?
Dear Senator,
I believe you should consider adopting the accrual basis of accounting for a number of
beneficial reasons. First of all accrual basis of accounting is a method of accounting that
recorders revenue and expenditures as they occur rather than other methods that record a
financial transaction when the cash is received. I will like to share some advantages of using
accrual basis accounting. It today’s societies accrual accounting is the most popular and
considered the most accurate way to record transactions. The reason for this is the accrual basis
records transaction at the time it occurs rather than any other time. Another great benefit
about accrual accounting is that can be easier to evaluate the complete financial wellbeing of an
organization rather than incorrect approximations. The standard of accrual accounting is also
useful when receiving payments from patrons, or when payments are sent to sellers. Since the
transaction are posted in the system, it is simply a matter of going back into the accounting
database you can go back into the specific invoice and view all the information you need about
the transaction at any point in time. This would a take a lot more time and be more complicated
if out of posting payments and receipts the other way around, allowing you to work on more
important tasks. By informing yourself with these important benefits I hope you consider
Accrual Basis Accounting as the official accounting system.
Yours cheerily,
Group D