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CS Executive · Corporate Accounting and Financial Management · Accounting Standards

According to the Conceptual Framework under Ind AS, why does accrual accounting give a better basis for assessing an entity's past and future performance than cash receipts and payments alone?

Accrual accounting shows the effects of transactions and events on an entity's economic resources and claims in the period they occur, even if cash is received or paid in another period. This gives a better basis for assessing past and future performance than cash flows alone.

  1. AIt records effects of transactions in the periods in which they occur, even if the cash moves in a different periodCorrect
  2. BIt records transactions only when cash is actually received or paid
  3. CIt avoids recognising any economic resources or claims until they are settled
  4. DIt ignores changes in market prices and interest rates

Explanation

Accrual accounting depicts the effects of transactions and other events on economic resources and claims in the periods they occur, even where the related cash receipts and payments fall in another period. Information on changes in resources and claims is a better basis for assessing performance than cash information alone. The cash-only option describes cash accounting, which is the opposite.

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