In the following report, an effort will be made to ensure that a proper understanding is being developed in respect to the accrual-based system of accounting. In addition to developing an understanding of the concept related to the accrual-based system of accounting the application of the same in case of the law firms operating in the market will also be understood. The understanding of the same is necessary due to many reasons. This system of accounting is recognised by Generally Accepted Accounting Principles as one of its principles. Due to this fact most of the entities are bound to follow this system of accounting. But, it has its own pros and cons. This system of accounting may be suitable for some type of companies or entities but the same may not be true for other entities (Fu et al., 2017).
Concept-related to accrual-based system of accounting
As per the concepts as laid down in respect of accrual-based system of accounting the revenue of the entity needs to be recorded in the financial statements of the entity when the corresponding income and expenses of the entity are actually earned or expended. The transaction and the income will have to be recorded in the books of accounts of the entity even if the amount in respect of it is not yet received (Bruno & Lapsley, 2018). For the purpose of recording the same in the financial statement of the company an asset named as accounts receivable will be debited in the books of the company. In the same manner, any expense of the company will have to be recorded even if the corresponding payment is not yet been made by the company or entity (Bruno & Lapsley, 2018). For the purpose of recording the same a liability named as accounts payable has to be recorded in the financial statement of the entity (Bruno & Lapsley, 2018). In addition this under this system the expenses of the company are also reported at times when the expenses of the company match the revenue of the company. It is needed to be understood that the main focus of accounting under this system is not the receipt or payment of cash rather it is focussed on mainly to things i.e. the number of revenues that were earned by the company for the relevant period of time and the expenses that were earned by the company for the relevant period of time (Ferry et al., 2018). Due to the presence of these features within this system of accounting, it is observed that the system is capable of offering a true picture of the profitability that is being earned by the company during an accounting period. In addition to this more accurate picture of the assets and liabilities of the entity is also given out by this system. The reason for this is that the system takes into several factors affecting the value of the assets and liabilities of the entity which may not result in the payment or receipt of any cash. One instance of such kind of element that affects the value of an asset or liability is depreciation (Ferry et al., 2018). The reason for this is that in case of depreciation no actual cash payment is being made but loss due to it is always recorded to account for the reduction in the value of the asset due to wear and tear, lower production capability and also due to obsolescence. Hence it can be said the accrual system of accounting gives a more accurate picture of things most of the time.
Performance interpretation of law consultancy firms under accrual-based accounting system:
The accrual system of accounting has many implications over the law consultancy firms operating based on this system of accounting. Some of the implications on the performance of these firms are as follows:
- The rules pertaining to the recognition of the revenue and expenditure can be quite complex. It has to be recognised that these firms are not very big in size and the resources available with them is very limited. Hence, it has to be considered that it will be a hassle for these firms to tackle the situation on a daily basis (Ferry et al., 2018).
- This system of accounting can lead to deception. The various sorts of complications related to this system of accounting can lead to deception for the various stakeholders of the entity.
- There is huge difficulty in switching costs:
The process of switching from one method of accounting to another especially in the case of accrual-based accounting system is very complicated. The reason for this is that several standards, law and regulations are needed to be followed.
From the above it can be ascertained that the accrual-based system of accounting is not very suitable in case of law consultancy firms. The primary reason for this being that the resources available with these firms are very limited and the complications related to this system of accounting can prove to be very demanding for these firms.
Fu, N., Flood, P. C., Bosak, J., Rousseau, D. M., Morris, T., & O’Regan, P. (2017). High‐Performance work systems in professional service firms: Examining the practices‐resources‐uses‐performance linkage. Human resource management, 56(2), 329-352.
Bruno, A., & Lapsley, I. (2018). The emergence of an accounting practice: The fabrication of a government accrual accounting system. Accounting, Auditing & Accountability Journal, 31(4), 1045-1066.
Ferry, L., Zakaria, Z., Zakaria, Z., & Slack, R. (2018, June). Framing public governance in Malaysia: Rhetorical appeals through accrual accounting. In Accounting forum (Vol. 42, No. 2, pp. 170-183). Elsevier.