The accruals and going concern concepts are regarded as fundamental in the preparation of financial statements. Discuss the advantages and disadvantages of these concepts, explaining the reasons why these concepts may be difficult to apply or may be inconsistent with other concepts.

1. Lewis Appleton Module code AC300
Seminar Leader: Mr D Finn 1 SeminarGroup02
The accruals and going concern concepts are regarded as fundamental in
the preparation of financial statements. Discuss the advantages and
disadvantages of these concepts, explaining the reasons why these concepts
may be difficult to apply or may be inconsistent with other concepts.
To start I will introduce the conceptof accrualsand goingconcern,accrualsare incomesorexpenses
that have been usedforbutnot yetbeenpaidfor,thiscan include thingssuchascustomers
purchasingoncreditor phone billsthatare invoicedatthe endof a givenperiodsuchasquarterly,
Financial ReportingStandards18paragraph 27 states "The accrual basisof accountingrequiresthe
non-casheffectsof transactionsandothereventstobe reflected,asfaras is possible,inthe financial
statementsforthe accountingperiodinwhichtheyoccur,andnot, forexample,inthe periodin
whichanycash involvedisreceivedorpaid”(FRC,2000). The goingconcernconcept is that the
companywill continue tooperate until the foreseeable future.The FRS18 paragraph 21 states“An
entityshouldprepare itsfinancial statementsonagoingconcernbasis,unless(a) the entityisbeing
liquidatedorhasceasedtrading,or (b) the directorshave norealisticalternativebuttoliquidate the
entityorto cease trading,inwhichcircumstancesthe entitymay,if appropriate,prepare itsfinancial
statementsona basisotherthanthat of goingconcern” (FRC,2000).
The main advantage of usingaccrual basedaccountingis thatthe accrualscan show thatthe
businessisn’tactuallylosingmoney,if all thatwasrecordedwasthe flow of cash thensalesmade on
creditmay be seenasa loss,byshowingthe accruedamountit ispossible forthose outsidethe
business,forexample potential investors,tosee thatthe businessisexpectedtobe received(based
on the assumptionthe customerwill pay) andisexpectedtoturnoveraprofitratherthan a loss,this
isessential because itwouldgreatlyimpactonthe investorsdecisionof whetherornot to invest.
Thisis alsoimportantbecause essentiallycashtobe receivedisanasset.A cash basedaccount
wouldshow a losswhichisnotthe case. Usingaccrual basedaccounts the salesor service in
questioncanbe recordedrightawaywhereaswithcashbasedaccountingyouwouldhave to waitto
receive orpaythe cash to recordthe transaction.
Thisis alsoapplicable the otherwayaroundinthe sense thatthe businessisusingaservice ithas
not yetpaid for; thisisusuallyinthe formof billssuchas telephoneexpenses.Forexample the
businessmaybe payingfor theirtelephone bill quarterly,thiswouldrequire the businessreceiving
the service for3 monthsandpayingwhatis owedat the endof those 3 months.Therefore if they
have a total usage of £1000 forthose 3 monthstheywouldbe sentaninvoice forthe amountas
theyhave usedbutnot paidfor the service.The accrual basisactuallyreflectswhathappens,notjust
the flowof cash. Revenuesandexpensesare recordedand matchedwiththe periodinwhichthey
occur; thisis regardlessof whethercashchangeshands.Forexample if thistelephonebillwas
invoicingformonthsfromthe previousyear(suchasNovember-January) thenthe accrual basiswill
record thisinthe firstyear,a cash basisof accounts wouldnotrecordthe revenue until yeartwo.
Dependingonhowmanyandthe value of these amountsitcanmake a large difference tothe
valuationof the businessatthe endof yearone dependingonthe methodusedandusingthe
accrual basiswouldhave a more desirable effect.

2. Lewis Appleton Module code AC300
Seminar Leader: Mr D Finn 2 SeminarGroup02
Wheneverthere are advantagesthere are of course disadvantages,one suchof accrual based
accountingisthat it requirestransactionstobe recordedwhentheyoccur,the salesmade oncredit
as a whole cannotbe generalisedintoone, andeachmustbe recordedindividually.Another
disadvantage isthatthe accounts are more difficulttoprepare thancash basedaccountsand thisis
due to regulationsbeingmore specific, cashbasedaccountsare more easierto prepare andrequire
lesseffort,someone whoisnotfamiliarmaystruggle todoaccrual basedaccounts.
Anotherdisadvantage of accrual basedaccountingisthatcash reportingmayappearas inaccurate to
those that are not familiarwiththe wayitworks.The ownerfor example couldbe misledinto
thinkingthatthere isactuallymore cashavailable because asale hasbeenmade whenthisactually
isnot the case because the moneyhasnotyet beenreceived,whatmayshow asa profitoverall on
an accrual basedaccount wouldbe shownasa losson a cash basedaccount whichismore specific
to the actual flowof cash andwhat can actuallybe spent.
To conclude Iwouldlike toreveal thatthe accrual basedaccountsare usedby manycompaniesona
weeklybasistoensure thathave adequate cashonhandto operate the business,Ifindthisisquite a
useful methodbecausethiscannotbe done usingthe cashbasedmethod,while the accountswill
showthe cash transactionsitdoesnot do a goodjob of matchingthe revenueswiththe moneylaid
out forexpenses.Thisparticularlyisaproblemwhenacompanybuysstockinmonth one to sell in
monthtwo andthishappensall the time insmallerbusinesses.Overall the accrual basedmethod
givesa betterrepresentationof the businessesposition,where itisatwith theirtotal value,what
has beenreceivedandwhatwill be received,the same beingtrue forexpenses. The goingconcern
conceptis alsoimportantasit assumesthe businessisgoingtobe ina positiontopayoff the
servicescurrentlybeingusedandthatthe businesswillbe operatingforthe foreseeablefuture.

3. Lewis Appleton Module code AC300
Seminar Leader: Mr D Finn 3 SeminarGroup02
Bibliography
FRC. (2000, December). FinancialReporting Standards18. RetrievedfromFRC:
http://www.frc.org.uk/Our-Work/Publications/ASB/FRS-18-Accounting-Policies/FRS-18-
Accounting-Policies.aspx