The hypothetical business in this instance is a Thai food restaurant. The restaurant is open 7 days a week from 11 AM to 3 AM. The extended hours are because the restaurant is located in a downtown area and is a popular gathering place after local bars close. As a result, the energy in the restaurant is casual and designed to cater to customers of all types and ages. The menu is simple and consists of a chalkboard. A few sample soups are on the board; however, most of the board is filled with ingredients for creating a unique soup or stir-fry dish.Due to the nature of the business, accrual accounting would be most beneficial. This is because many people do not carry cash and only use credit/debit cards. Accrual accounting allows for up-to-date record keeping based on the use of credit/debit cards, as compared to cash based accounting, which only considers actual currency (Horngren, Datar, Foster, Rajan, & Ittner, 2009; Horngren, Sundem, Burgstahler, & Schatzberg, 2014). If the company uses accrual accounting, sales can be recorded immediately through accounts receivables (or cash) and sales. However, if the company uses cash based accounting, sales can only be recorded when cash is received, suggesting that immediate records would only be for cash and sales.
GAAP recognizes accrual accounting because it is most up-to-date and reflects, most accurately, the actual financial health of the organization. This means that the financial transactions are most transparent through accrual accounting, rendering it most effective. Moreover, since the transactions are most up-to-date, it is more possible to manage the business because goals can be set accordingly and based on the current financial health. Adjusting entries are required because it ensures that the accounts balance themselves effectively.
- Horngren, C. T., Datar, S. M., Foster, G., Rajan, M., & Ittner, C. (2009). Cost Accounting – A Managerial Emphasis (13th ed.). New Jersey: Pearson Prentice Hall.
- Horngren, C. T., Sundem, G. L., Burgstahler, D., & Schatzberg, J. (2014). Introduction to management accounting (16th ed.). Boston, MA: Pearson Education, Inc.