The method of accounting that is consistent with General Accepted Accounting Principles is the accrual basis accounting method. This method applies the matching principle and records revenues when it is earned and expenses once they occur. The accrual basis is used because it provides a better sense of a company’s overall financial health compared to the cash basis accounting method. The purpose of the generally accepted accounting principles (GAAP) is to create a set of rules for consistent and accurate financial reporting. The GAAP requires accrual accounting compared to the cash accounting because the accrual basis best fits the defined objectives set by the Financial Accounting Standards Board (FASB).
The benefit of using the accrual basis is that a company has a better idea of the costs involved in running the business every month and has a clear understanding of the amount of money it makes every month. Additionally, recording revenues as they occur can give a company an adequate estimate of the amount of money it is going to have at the end of each month. This helps a company determine how much it will earn in profit and how much it can spend. Recording the expenditure for each month, the company can anticipate the amount of revenue it would require every month to cover its expenses.
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Accrual accounting requires that transactions are recorded in the time period when a financial event occurs. Cash basis accounting records transactions when cash comes in or leaves the company’s account. If a company sells an item to a customer through a credit account and the payment becomes delayed for several months, the accrual method records all the transactions at the point when the sale occurs. If the cash accounting basis was used, this transaction would not be recorded even after the item leaves the inventory. Investors would then be left in the dark with respect to the actual sales performance and the total inventory present. While financial statements can be done using cash basis, cash basis is not acceptable under GAAP.
