Fundamental Accounting Principle essay
The current performance of the company headed by Wendy Geiger is quite successful but the company has to change its accounting system. Wendy Geiger should change her approach to accounting. In actuality, she uses cash accounting, which may be quite effective but this method is time consuming and difficult to implement as the business grows. In such a way, the introduction of accrual accounting can improve the accounting and Wendy Geiger should consider the possibility of the introduction of accrual accounting instead of cash accounting she uses at the moment.
Basically, cash-basis accounting is an accounting method that involves using the cash flow and cash position to conduct accounting records. The records are made respectively to the cash flow and cash position. In actuality, Geiger is using cash flow method (Wild, et al., 2009). This method of accounting seems to be quite simple and logical and this is why many politicians tend to choose it. In addition, cash-basis accounting permits to follow cash flow strictly that create an impression of strict control over revenues and expenses of the state budget, for instance.
However, in actuality, cash-basis accounting is not really effective and, what is more important, specialists estimate that it can hardly give a true and fair view on the financial performance, especially in a long-run. In this respect, accrual-basis accounting seems to be more preferable because it has a number of advantages compared to cash-basis accounting. Accrual accounting focuses on economic activities and records are made when economic activity is complete. For instance, when transaction is complete and the seller receives money from the buyer the record is made. In such a way, Geiger can apply accrual accounting to improve her record tracking and facilitate her accounting method (Wild, et al., 2009). Obviously, in terms of a state this may be viewed as a significant advantage because the economic life of a country cannot depend on the financial activity solely, instead, a country has a complicated economic system that involves various activities and cash payments, which are the basis of cash accounting, cannot always reflect the true situation. In contrast, accrual accounting guarantees that Geiger records revenue she earns it, regardless when the actual payment is received. Expenses are matched in the similar way. As a result, accrual accounting provides more precise information on the current situation, while cash-basis accounting defers postpones credit transactions relying on the buyer, who completes transactions later (Wild, et al., 2009).
Obviously, accrual accounting is more complicated compared to cash accounting and naturally evokes apprehensions concerning possible errors or even frauds. However, the contemporary information technologies and the use of modern software minimizes the risk of mistake and makes the use of accrual accounting not only more effective but also cheaper. Thus, in spite of the complexity of accrual accounting this method is more preferable to use at the state scale.
Therefore, accrual accounting is more effective compared to cash-accounting, when business keeps growing as is the case of Wendy Geiger’s case. To put it more precisely, the cash accounting is effective as long as Wendy Geiger conducts business with individual customers because Wendy Geiger could conduct the accounting effectively making records on the ground of the current cash flow. In such a way, the company can use cash accounting to record the cash flow accurately. However, this method becomes ineffective, when the company grows. For instance, today, Wendy Geiger deals with corporate customers that make the cash accounting ineffective. Instead, accrual accounting can help Wendy Geiger to conduct credit payments as well as other but cash transactions. In such a way, the company can conduct accounting more effectively and save time.
In fact, accrual accounting is convenient, when the company conducts electronic and credit transactions because it allows recording revenues, when they are actually earned. In such a way, the accrual accounting mirrors the actual performance of the company. In this regard, it is important to understand that the cash accounting is ineffective because Wendy Geiger cannot assess adequately her revenues, in case some problems with some credit payments occur. Therefore, accrual accounting will be more effective.
However, the implementation of accrual accounting will need the use of software that will facilitate the use of accounting. The use of software will help Wendy Geiger to make her accounting system more effective and it will be easier to use with the help of software, especially taking into consideration the fact that Geiger does not have professional education in the field of accounting. In this respect, it is possible to recommend using Quick Books Pro 2011, which is quite easy to use and which is reliable. In fact, this software makes complex accounting tasks, such as billing, payroll management and reporting surmountable for small business owners, like Wendy Geiger. On the other hand, this software does not store inventory location information. Nevertheless, in case of Wendy Geiger, Quick Books Pro 2011 may be quite effective and simple tool to use for automation of the accounting process and implementing accrual accounting approach. Alternatively, Geiger can use Sage Peachtree Complete Accounting 2012, which can help to manage all aspects of business but this software is more difficult to use.
Thus, Wendy Geiger should consider the possibility of the introduction of the accrual accounting, which may be backed up by Quick Books Pro 2011.
