Answer to Question #230324 in Accounting for Rene

Question

General accounting practice is based on the accrual concept. Explain what this means and describe how this compares with the financial manager's focus on cash.

Answer 1

Solution:

The accrual concept is an accounting method where transactions are recorded in the period they occur, regardless of whether payment is received or not. That is, revenues and expenses are recorded immediately after they are incurred. It follows the matching principle, which states that revenues and expenses should be recognized in the same period they occur.

 

The financial manager’s focus on cash is where financial managers focus on cash flows, that is the inflows and outflows of cash in the company. They plan and monitor the firm’s cash flows to ensure that cash is available when required. Financial managers must track how money is flowing into and out of the firm, such as cash collections and disbursements to ensure that the company has enough cash to meet its obligations.

This differs from the general accounting practice which is based on the accrual concept where accounts are recorded whether cash payments are received or not.