Accrual basis and cash basis measure of performance Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Accrual basis and cash basis measure of performance Case Study Solution

Introduction

Accrual-based performance is bit different from cash-based measure of performance. The main change both the methods of its timing in the accrual-based accounting, sales are recorded when they are earned, however in the cash-based accounting, sales are recorded when the cash is collected against those revenues. Moreover, in the accrual-based accounting, expenses are recognized when they are occurred and on the other hand, in the cash-based accounting, expenses are recognized when cash is paid against those expenses. (International Federation of Accountants, 2014)

Situation

As compare to cash-based accounting, accrual-based accounting produces more accurate results as in this method, revenues and expenses are recognized in the same period of time and that constitutes a better representation of actual events and this is why accrual-based net income is more accurate than the cash-based net income. On the other hand, cash-based income can lead to misrepresentations due to the cash collection that is not aligned with the actual timing of the sale.(Fazal, 2011)

Accrual basis and cash basis measure of performance Harvard Case Solution & Analysis

For example: if you sell $8000 worth of hardware, under the accrual method, the amount is recognized in the book, either you have received cash or not, but under the cash method, that amount will not be recognized unless you revive the cash against that transaction. This same thing occurs for the recognition of expenses. If you have received the electricity bill of $1500, under the accrual method, that bill will be recognized in the expense section of the income statement, either you have paid the bill or not, but under the cash-based model, you will not recognize that unless you pay that bill.Moreover, the purpose of making the adjusting entries is to properly record revenues and expenditures in the correct period of time. For example:if you realize that you have incurred extra expense for the last year’s utilities then in the accrual-based method, adjusting entry would be made in the previous year income statement, however in the cash based method, thecompany would some extra amount in the current year utilities. (Andrew, 2008)

Conclusion and recommendation

From above analysis, we can conclude that accrual basis measure performance produces more accurate results than the cash basis measure of performance. So it is recommended to Mr Sean Pitt to use the accrual-based accounting.................

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