As we all know, this method recognizes revenues and expenses as of the date they occur. Although this method offers advantages in some ways, there can be drawbacks in other ways. This is because, accrual accounting brings about more subjectivity into the accounts and this could distort accounting information produced.
The single most important issue in accrual basis accounting is that it requires transactions to be recorded at the times of their occurrence. Since invoices do not coincide with actual events, this approach necessitates some estimation and guesswork on the part of accountants working under accrual basis accounting. Furthermore, an entire set of rules and regulations have grown up and around these uncertainties in order to guide their accounting, which means that accrual basis accounting is harder to perform than cash basis accounting.
The second disadvantage of accrual basis is in term of revenue recognition. Under the accrual method, businesses have no leeway in paying taxes. This method states that revenue is recorded as soon as it is earned. The date a business actually receives payment for the sale has no effect on the books other than to record the receipt of cash. This also means that income taxes may be owed on revenue before payment is actually received. Since revenue is recognized on the date it is earned, a company may end up paying more in taxes for the year than what it actually received in payment.
Furthermore, accrual accounting usually requires business owners to spend more time managing their financial information. Because accrual accounting records financial transactions as they occur, more journal entries are needed to post financial transactions into the company’s general ledger. Closing out accounting periods also necessitates the use of journal entries. In term of cash flow problems, the accrual…