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Basis of accounting refers to the body of accounting principles that determines when the effect of a financial transaction or event should be recognized for financial reporting purposes. It is a set of rules that determine when revenues and expenditures are recognized in the books of accounts. Unlike Private Business Accounting, many different basis of accounting is accepted in Public Sector Accounting. However, in recent times, there have been strong advocate by the body of Accountants and some NGOs that Ghana should adopt Accrual Basis of Accounting in the Public Sector as in the Private sector to increase the level of accountability in the Public Sector. Required: Justify with five (5) reasons why in your opinion, the Accrual Basis of Accounting should be adopted by Ghanaian State entities in preparing their Financial Reports and give five (5) possible challenges they are likely to encounter by adopting the Accrual Basis of Accounting.

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Answer:

The Accrual Basis of Accounting is defined as a method used by the company to document the transactions when the event is added together rather than when cash is received.

The advantages or reasons of adopting Accrual Basis of Accounting and it's challenges is stated below in the explanation section.

Explanation:

Solution:

Accrual Basis of Accounting is refers to a tool used by the company to document the transactions when the event is added together rather than when cash is received.

The following are reasons in adopting Accrual Basis of Accounting which is stated below:

  • It assist in the maximization of  operational abilities of business by spreading the revenue recognition.
  • It provides the clear view of business regarding transactions that transpire over a period of time.
  • Transactions that are documented over time under accrual basis of accounting are considered to be precise.
  • Accrual basis of accounting helps the investors to invest their money in the business.
  • Business associated with accrual basis of accounting produce statements on monthly basis

The challenges encountered while adopting  the Accrual Basis of Accounting is stated below:

  • Companies using the accrual basis of accounting  may encounter difficulty as it demands excessive generation of reports which may take a lot of time.
  • Under this accrual basis, business taxes are paid on revenues much more than they are actually received.
  • By making use of Accrual basis of accounting, small companies faces major problems due to non availability of staff for operating accrual basis.
  • It creates problems in accessing transactions and also difficult in tracking of payments.

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