ENG 315 Justification Report Help

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A business is legally required to maintain books of account. It might sound like a lot to ask but it is actually essential for a company to have its books of account in order. Over the years, as a financial consultant, I have come to realize that in most cases clients struggle to come up with the right mix of methods to adopt when doing their accounting. The lack of consistency in their accounting procedures has often lead to considerable losses. In the case of new establishments the lack of proper accounting can be cited as one of the reasons as to why most start- ups close down within the first three years of operation.

I am of the opinion that, with the adoption of a convenient accounting method there is no reason to mix and match risking falling in deep financial trouble. One of the alternatives in this case is the cash based accounting method. As the name suggests, transactions are only recorded in the books of account if cash is actually received or paid out. As such accounts receivable and accounts payable are not recognized under cash based accounting. Cash based accounting is preferred by small businesses since it is simple to maintain and actually shows what cash is available to the business at a specific time. The other alternative is the accrual based accounting. In this case all transactions are updated immediately they have occurred (Gibson & TMW Media Group, 2009). This is in disregard to the time when there is the delivery of the item or the item is paid for. It gives a more realistic picture of income and expenses at the time.

The alternatives/ possible solutions can be analyzed and compared on the basis of a couple of criteria namely: size of business, method of sales, annual sales, efficiency, and desirability.

Evaluation of Alternatives

· Size of business

· Alternative A: Cash based accounting

Cash based accounting is preferable for small businesses owing to the fact that it is easy to use. This method can be maintained perfectly by one proprietor without needing elaborate accounting skills.

· Alternative B: Accrual based accounting

Accrual based accounting is more practical in the case of a larger business. This is mainly due to the fact that as a business grows it needs to track its revenues and expenses more accurately.

· Method of Sales

· Alternative A: Cash based accounting

This accounting method can only be used if a business sells its goods on cash basis. This is based on the principle on which the accounting method is built.

· Alternative B: Accrual based accounting

Accrual based accounting is very versatile in this case. Since transactions are recorded once they occur, both cash and credit sales can be perfectly handled by this accounting method (Fishman, 2015).

· Annual sales

· Alternative A: Cash based accounting

Cash based accounting as illustrated is only convenient when dealing with simple accounts. When business sales exceed $5 million, the method becomes a limitation.

· Alternative B: Accrual based accounting

It is advisable that once sales exceed $5 million per year this is the appropriate method to use. This is because this method is better at following up revenues.

· Efficiency

· Alternative A: Cash based accounting

Budgeting is not possible while using cash based accounting due to its emphasis on cash flows.

· Alternative B: Accrual based accounting

Accrual accounting and budgeting using the same improves cost information which is very important for decision makers. It also leads to improved financial discipline during the budgeting process (Blondal, 2004).

· Desirability

· Alternative A: Cash based accounting

A cash based system is easy to maintain so any working staff involved would have no problem with the method since in their view it saves a lot of time.

· Alternative B: Accrual based accounting

Accrual based accounting is more complex and requires some accounting skills and knowledge. It could be a little confusing and tasking for the staff so getting them on board initially could be tricky.

Alternatives Analyzed by Criteria

Findings and analysis

At the beginning of the fiscal year, the firms that will be chosen in the above test hypothesis will be classified for their transaction to be considered under the cash or the Accrual systems. For the fiscal year, all their transactions will strictly be in the above criteria, this should be done for the next three fiscal years. Three years is the threshold time framework that has been identified for a joining business to exit the business. At the end of this time, the businesses that have been under evaluation will be investigated as whether existing or demolished. How they shall be fairing and coping up with the tax system (Hubbard, 2007). The system that will have yielded a greater percentage of success will become the guiding principle. When the favorite alternative is chosen as an accounting firm it should be the firm’s principle to give the upcoming firms on the accounting method that would best suit for their existence in the market.

References

1. Blondal, J.R. (2004). Issues in Accrual Budgeting. OECD Journal on Budgeting- Vol. 4. No.1.

2. Fishman, J.D. (2015). Cash vs. Accrual Accounting.

3. Gibson, J., & TMW Media Group. (2009). Work problems. Venice, CA: TMW Media Group.

4. Hubbard, L. R. (2007). The problems of work: Scientology applied to the workaday world. Los     Angeles, Calif: Bridge Publications, Inc.