Question

Dr.K.Kumar, a homeopath doctor in a practice has been advised by his Accountant to maintain his accounts on Accrual basis instead of presently followed Cash basis of Accounting. Do you agree with the advice of the Accountant? Give reasons.

Answer 1

Yes, I agree with the advice of the accountant because...... the Fundamental accounting assumptions are
Going concern , consistency and accrual basis of accounting.....under accrual basis of accounting , transactions are recognised as soon as they occur(whether or not cash/cash equivalents are actually received or paid).. Accrual basis ensures better matching between revenue and cost and profit/loss obtained from it will reflect activities of the company rather than that of mere cash flows.....So it is more logical approach to profit determination than the cash basis of accounting..so for this reason accrual basis is followed widely......how ever there is no compulsion for anybody to follow accrual basis only...Dr.K.Kumar can even follow cash basis also ...but if he follows cash basis he should disclose it in the financial Statements. its up to him whether to follow Accrual or cash basis. but Accrual basis will be logically superior