Business entities always seek to adopt the appropriate method for recording their accounting transactions considering the magnitude and nature of their business activity. The most common accounting methods include cash basis accounting and accrual-basis accounting, where small or newly established large entities adopt the cash-basis accounting method as it is much easier, while medium and large entities use the accrual basis method.
However, the International Financial Reporting Standards (IFRS), which are applicable in the State of Kuwait, mandate business entities to adopt the accrual basis while preparing their annual financial statements.
In this context, business entities need to adopt the concept of conversion from cash basis to accrual-basis accounting if they want to be compliant with legislation and the IFRS.
What is the difference between a cash basis and an accrual basis?
In cash basis accounting, revenues and expenses are only recognized when money change hands. Therefore, accounts receivable and accounts payable are not recognized according to this method.
While in accrual basis accounting, revenues, and expenses are recognized upon maturity, regardless of the actual receipt or payment, and hence revenues and expenses are recognized in the statement of financial position of the business entity.
Cash Basis and Accrual Basis: Advantages vs. Disadvantages
In a nutshell, the advantages and disadvantages of both methods are as follows:
What is the added value for business entities by adopting conversion from a cash basis to an accrual basis?
- Ensure compliance with applicable legislations and IFRS.
- Enhance the stakeholders’ trust in the financial reports issued by the business entity.
- Help make informed decisions based on accurate and comprehensive financial information.
What are the services that Baker Tilly Kuwait provides?
Accounting consulting services regarding the conversion from cash basis to an accrual basis.