 Hello, in this discussion we will discuss the discussion question of, discuss how accrual accounting enhances the usefulness of financial statements. When considering accrual accounting and whether or not it increases, or in this case we're saying definitively in the question that it does increase the usefulness of financial statements, we are comparing it then to the cash basis. It doesn't say that explicitly, but if we're saying how does the accrual accounting enhance the usefulness of financial statements, we have to assume what are we comparing that to possibly just reporting things on a cash basis. So this is really another kind of way of saying what's the difference between a cash basis and an accrual basis and why is the accrual basis better. Now note that we are saying in the question here the discussion question or the essay question if you see this is assuming the accrual method is better. I've talked to a lot of people when we learn accounting that insists that a cash method is better and there are advantages and disadvantages to a cash basis method. The accrual method is typically thought to report things more accurately and we'll discuss that as we go. But just note that if you're recording a question for a test that is going to be some kind of formal test that the assumption will generally be that the accrual method is better for it. So even if you have a personal opinion about whether the two methods are better you really want to argue on the accrual method side if you're going to look to pick up the most points as we can see just in the wording of the question here. So the idea then on the accrual method is basically we have the revenue recognition principle and the matching principle being the driving accrual principles that are different than the cash method. And the point of those two principles is to record more accurately the revenue and expenses that have been incurred in a particular time period. So we probably want to focus more on the income statement the timing statements to recognize performance because performance is really what we're going to be try to measuring over time. When we when we compare one month to the next month we're typically looking at well how did we do how much revenue did we earn how much expenses did we incur in order to generate that revenue. And so that's going to be the income statement and the timing issues. And if we look at the accrual method we're going to record under the revenue recognition principle at the point in time that we earned the revenue. So when we earned it we're going to record it not when we receive the cash and on the expense side when we have incurred the expense in order to help generate revenue that's the matching principle we incurred it in order to achieve the business goal matching it to the business goal of generating revenue. At that point in time that's when we incur the expense. Now when comparing that to a cash basis you might think well it seems more fair to just say when the cash either goes into the company or out of the company because we're so dependent on cash flow but note that cash flow is going to be different than basically performance. We will measure cash flow in a cash flow statement but we also want to measure what we actually did because cash flow can actually very much very greatly distort our performance from month to month. We can greatly distort our performance as we report it from month to month if we were to be on a cash basis and we just wanted to manipulate the cash flow by saying things like why don't we have more revenue by asking our customers to pay us in advance possibly for a discount for services that will be done in the future that would probably increase the revenue on a cash basis but on a cruel basis it wouldn't increase the revenue because we wouldn't be able to recognize it until we actually did the work. On a cash basis we can manipulate net income on the expense side for example if we wanted to possibly lower our net income say for taxes or something like that we could try to prepay a lot more of our expenses and in so doing we could lower our net income because the cash was paid even though we haven't incurred the expense for example the insurance if we paid the insurance for like three years or if we prepaid our rent for a year in advance then we can record the expense today under a cash method and even though we're not going to pay it again for a year it's really the benefit is applying to a future future periods and it's really something that can be seen in something like purchasing a vehicle or equipment if we purchase a vehicle or equipment for cash and it costs us a good deal of money a hundred thousand dollars let's say we would get to deduct that or on or put it on as an expense lowering net income at the point of purchase under a cash method and under the cruel method we would have to put it on the books as an asset and then apply the expense out to the periods it was used in. Now even a cash basis method even if even people using a cash basis or even if we're on a cash basis for taxes typically we'll still put a large piece of machinery on the books as an asset and so that's even under a cash basis most people deviate on that particular area because it's so blatantly not not representative of of the matching principle but on a pure cash basis we should just expense it because we've paid the cash at the point of purchase even if it was a building that we purchased for like five hundred thousand if we paid cash for it we would under a cash basis technically expense it at that point in time which really would not look good if we tried to compare one month to the next month or one year to the next year because clearly that building is going to benefit the company for a long period in the future the purchase today is is a benefit for the future and therefore the matching principle would not be in accordance with that so that's going to be the major principle the accrual principle remember you're always going to want to argue for the accrual principle when picking up the most points as being the better principle because it it reports better in accordance with the matching and the revenue recognition principle and whenever you see something like this it's basically comparing it to a cash basis and note that the two things always aren't completely separate as well because a lot of types of transactions will be the same under an accrual basis under a cash basis and many companies that even if they're on a cash basis like on a tax code they might try to run on a cash basis even still they're still going to have elements of an accrual principle like the one we just talked about if we were to purchase a large piece of equipment so the two the two principles sometimes people are running more of a hybrid principle especially if they're on a cash basis and sometimes they're using some accrual and some not whether that be right or wrong and a lot of times the two bases he's will not differ in many types of transactions but where they will differ will be timing differences and the accrual principle is thought to be more accurate in being able to compare performance from period to period