• 4 Marks

PSAF – May 2020 – L1 – Q1a – Accounting policies for cash and accrual-based accounting systems

Discusses the differences between cash accounting policies and accrual accounting policies concerning their recognition and treatment in financial statements for various accounting elements.

Cash accounting policies and accrual accounting policies, when applied respectively to the same transaction or events of the same entity, will produce different pictures of the financial performance, position, and cash flow information of the entity. Thus, the choice of alternative policies needs to be given much consideration. The International Public Sector Accounting Standards Board (IPSASB) permits the use of cash accounting policies whilst encouraging the application of accrual accounting policies in the preparation of financial reports for the public sector.

Required:
Discuss the difference between cash accounting policies and accrual accounting policies in terms of recognition and/or treatment of the following in the Financial Statements: i) Revenue
ii) Capital asset
iii) Allowances and provisions
iv) Contingent liability

  • Revenue
    • Cash accounting policy: Revenue is recognized in the statement of cash receipt and cash payment when received. No asset is recognized when the revenue is not received at the reporting date.
    • Accrual accounting policy: Revenue is recognized when earned but not when received. Revenue receivable is treated as assets on the statement of financial position.
  • Capital asset
    • Cash accounting policy: Capital assets are recognized as expenditure for the year in which the asset was purchased or developed. No depreciation is charged to the determination of the cost of service of the period.
    • Accrual accounting policy: The asset is recognized as an asset. The cost of the asset is written off over its useful life in the determination of financial performance.
  • Allowances and provisions
    • Cash accounting policy: No room for allowances and provisions since recognition is purely on a cash basis.
    • Accrual accounting policy: Allowances and provisions are made on receivables, stock loss, and non-current assets.
  • Contingent liability
    • Cash accounting policy: Contingent liabilities are not recognized until they result in an actual cash outflow.
    • Accrual accounting policy: Contingent liabilities are recognized when they are probable and can be reasonably estimated, even if no cash outflow has yet occurred.
      ===============
Back to all questions

Pick a Form

Professional Tutor Application Form
Academic Tutor Application Form
Student Tutor Application Form