Explain the difference between the accrual basis and the cash basis of accounting and why GAAP requires the accrual basis.

Statement of Financial Accounting Concepts No. 1 states that one of the objectives of financial reporting is to help “current and potential investors and creditors (and other users) in assessing the amounts, timing, and uncertainty of future cash flows such as dividends or interest payments.” Generally Accepted Accounting Principles (GAAP) require the use of the accrual basis of accounting.