The “Cash Method” of Accounting: Definition and Using

Subject: Accounting
Pages: 1
Words: 265
Reading time:
< 1 min

There are a number of pros and cons regarding both the cash method and the accrual type of accounting, yet a noticeable tendency for most major companies to opt for the latter, while less influential SMEs prefer the former for managing their financial transactions persists in the global market. The reasons for major corporations to opt for the accrual strategy in accounting are quite obvious; according to the existing definition, the cash method does not presuppose that either the income or the losses should be counted until the actual financial transaction is carried out.

While the specified scheme works quite well for minor organizations, a larger company cannot afford to make financial transactions without coming up with a clear and detailed financial statement. Since the latter requires making certain suppositions concerning the expected losses and the anticipated income, there is no way for a major corporation to adopt the cash method as the key to its accounting strategy.

More to the point, it is important to bear in mind that a corporation must compile a statement of cash flows, which also demands a very careful calculation of the expected operating expenses. Consequently, it would be unreasonable to adopt the financial accounting strategy, which disregards the possible costs and losses, therefore, making the company more vulnerable to outside factors. A possible way out for a small or medium company in terms of defining the accounting strategy, the aforementioned approach makes a major corporation exposed to the possible negative factors, therefore, creating the premises for a failure.