on numerous occasions, proposals have surfaced to put the federal government on

Question

on numerous occasions, proposals have surfaced to put the federal government on the accruals basis of accounting. This is no small issue. If this basis were used it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially. - What is the difference between accrual-basis accounting and cash-basis accounting? - why would politicians prefer the cash-basis? - if you had to explain why the federal government should adopt the accrual-basis of accounting what would you say?

Explanation / Answer

Accrual basis financial statements do a better job of matching revenues with expenses for a particular time period. The income includes sales for which you have done the work haven't yet been paid (your receivables) and the expenses include expenses incurred for the the period that you have not yet paid (payables). It gives a more accurate picture of the actually costs and revenues associated with the time period you are looking at because with cash basis it would be skewed by when the cash was received or paid out. Example: You could have done a lot of business in year one but if you don't receive the cash until year two it may look like year one was not successful as it really was. Cash basis is good for someone who doesn't carry a lot in receivables, like when payment is made at the time of the sale, or for a business that is very seasonal and for people who don't need much out of their financial statements other than to have them for tax purposes.

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