One of the most popular methods of recognizing
transactions in the accounting world is the accrual method. The accrual method
means that a transaction is recognized when the performance obligation is
satisfied, and the cash is received later. However, the accrual method has two
problems that can lead to the accruals “going bad”, or the cash not being
received: the foggy crystal ball theory and evil managers.
The future is hard to plan for which is why it is hard
for accountants to know how much money will be received. The crystal ball is
foggy because many things can happen that will prevent the seller from
receiving the cash since the buyer does not pay up front (L., C., 2010). The
accounting estimates can be difficult to determine, and, depending on the manager’s
skills, can be inaccurate.
Unfortunately, not all managers are honest. These evil
managers will misstate the financial statements on purpose in order to receive
benefits. The managers can be greedy and want to receive higher bonuses, job
promotions, etc. (Doyle, 2014). When the managers purposefully misrepresent the
information on the financial statements, the accrual definitely does not turn
out and the cash is not received.
Accrual accounting is a good method for accounting, but
there are problems that cause discrepancies in the financial statements. The
problems are caused by the foggy crystal ball theory and evil managers.
References
Doyle, J. (2014, September 9).
Intermediate financial accounting 3110. Lecture at Utah State University, Logan,
UT.
L., C. (2010, February 12). Cash vs
accrual accounting for taxable income and expenses [Web log post]. Retrieved
from http://www.sba.gov/blogs/cash-vs-accrual-accounting-taxable-income-and-expenses
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