Which accounting method provides a better view of ongoing performance and liquidity?

Which accounting method provides a better view of ongoing performance and liquidity?

• A. Accrual accounting
• B. Cash accounting
• C. Tax basis accounting
• D. Modified cash basis

Answer: (A)

Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash actually changes hands. This aligns income and costs with the periods in which the related activities occur, so you see how the business is performing over time rather than just how much cash happened to move. It also makes visible obligations and resources that aren’t yet settled in cash—through accounts receivable and accounts payable—so you get a fuller picture of liquidity as it relates to ongoing operations. In contrast, cash accounting only tracks cash receipts and payments, which can distort both performance and liquidity when timing shifts occur. Tax basis and modified cash basis are hybrids or tailored for tax purposes, and they don’t provide as complete a view of ongoing performance and liquidity as accrual does.

Accrual accounting records revenues when earned and expenses when incurred, regardless of when cash actually changes hands. This aligns income and costs with the periods in which the related activities occur, so you see how the business is performing over time rather than just how much cash happened to move. It also makes visible obligations and resources that aren’t yet settled in cash—through accounts receivable and accounts payable—so you get a fuller picture of liquidity as it relates to ongoing operations. In contrast, cash accounting only tracks cash receipts and payments, which can distort both performance and liquidity when timing shifts occur. Tax basis and modified cash basis are hybrids or tailored for tax purposes, and they don’t provide as complete a view of ongoing performance and liquidity as accrual does.