Application of accrual and cash accounting: Implications for sales in Metro Manila

• Main Author: Cudia, Cynthia P.
• Format: text
• Language: English
• Published: Animo Repository 2007
• Subjects: Accrual basis accounting; Small business—Accounting; Cash basic accounting; Accounting
• Online Access: https://animorepository.dlsu.edu.ph/etd_masteral/3493; https://animorepository.dlsu.edu.ph/context/etd_masteral/article/10331/viewcontent/CDTG004281_P.pdf
• Institution: De La Salle University

The use of high quality, and globally adopted financial reporting structures based on international accounting standards promotes full disclosure and transparency. These facilitate the delivery of financial information that is comparable and reliable, not only across companies but across countries as well. On the basis of the fundamental assumptions of accounting, principles are developed. These dictate how economic events are recorded and reported. To measure organizations performance and reflect its financial condition, two accounting methods are being used: the accrual accounting and cash accounting. Under the accrual method, revenues and expenses are recognized in the accounting period in which they are considered earned and incurred, regardless of inflow or outflow of cash. On the other hand, cash-basis accounting method recognizes revenue when cash is received and expenses when they are paid. International Accounting Standards Board (IASB) believed that the international accounting standards are suitable for application in all companies whether they are listed or not, large or small. However, the issue of the application of accounting standards to small and medium enterprises (SMEs) has been the subject of numerous studies around the world. Every so often, debate arises whether separate accounting and reporting rules should be set for SMEs. The debate has generally revolved around one issue whether accounting standards should apply equally to all financial statements or whether SMEs should be exempted from the requirements of certain standards. Because of the importance of SMEs, IASB published on February 15, 2007 an Exposure Draft of an International Financial Reporting Standard for Small and Medium sized Entities (IFRS for SMEs). This research aims to provide valuable information to enhance the Exposure Draft. To present the findings of the study, a copy of the paper shall be forwarded to the Financial Reporting Standards Council (FRSC). xii Section 2.33 of the Exposure Draft provides that SMEs shall prepare the financial statements using the accrual basis of accounting. Likewise, Philippine Accounting Standards (PAS) 1: Presentation of Financial Statements requires the adoption of accrual accounting method. This paper examined whether SMEs in Metro Manila comply with or do not comply with this specified rule. This research aims to determine which between the two methods of accounting, accrual or cash method, is more applicable to SMEs in Metro Manila. Accordingly, this paper aims to determine the factors that influenced SMEs in Metro Manila to apply the chosen accounting method. This paper specifies some implications of using accrual and cash accounting. It includes implication to qualitative characteristics of financial information, to Income Statement and Balance Sheet, to SMEs liquidity and profitability positions; and implication of using cash/modified-cash basis converted to accrual basis at year-end. The results of the study will provide insights on the applicability of the Exposure Draft, as to the bases of accounting. This study is timely as the comments on the Exposure Draft are open for submission until October 2007, while the final standards are expected to be issued by the IASB in the second half of 2008. This study will be relevant for the FRSC in considering the applicability of the international standard to SMEs in the Philippines, before its adoption as generally accepted accounting principle (GAAP).