Question

What are the bases of accounting? Describe how government accounting systems are structured. How do they help prevent fraud and guarantee conformance with legal requirements? Give examples.

Answer 1

The basis of accounting refers to the methodology under which revenues and expenses are recognized in the financial statements of a business. When an organization refers to the basis of accounting that it uses, two primary methodologies are most likely to be mentioned:

Cash basis of accounting. Under this basis of accounting, a business recognizes revenue when cash is received, and expenses when bills are paid. This is the easiest approach to recording transactions, and is widely used by smaller businesses.

Accrual basis of accounting. Under this basis of accounting, a business recognizes revenue when earned and expenses when expenditures are consumed. This approach requires a greater knowledge of accounting, since accruals must be recorded at regular intervals. If a business wants to have its financial statements audited, it must use the accrual basis of accounting, since auditors will not pass judgment on financial statements prepared using any other basis of accounting.