Financial Accounting: Comparing Accrual and Cash Basis with JB Hi-Fi

This assignment delves into the fundamental concepts of financial accounting, specifically contrasting the cash basis and accrual basis methods of recording business transactions. It explains that while the cash basis method is simple, it doesn't accurately reflect a company's financial position, making the accrual basis, which aligns with standards like IFRS and GAAP, the preferred method. The assignment highlights how accrual accounting records revenues when earned and expenses when incurred, regardless of cash flow. It then applies these concepts to JB Hi-Fi, an Australian company, demonstrating how accrual adjustments impact its financial statements, particularly focusing on lease accruals within the context of its financial reports, referencing the impact on revenue, expenses, and liabilities, and the importance of adhering to accounting standards like AASB and IFRS.

Running head: INTRODUCTION TO FINANCIAL ACCOUNTING
Introduction to Financial Accounting
Name of the Student:
Name of the University:
Author’s Note:

1INTRODUCTION TO FINANCIAL ACCOUNTING
Table of Contents
Answer to Question 2:................................................................................................................2
Reference:..................................................................................................................................4

2INTRODUCTION TO FINANCIAL ACCOUNTING
Answer to Question 2:
In general, there are two main methods, used widely, to record the business
transactions – Cash basis and Accrual basis. Under cash basis method, the firms record only
such transactions, which cause any cash inflow or cash outflow. On the other hand, the
transactions, which are related to any particular period, must be recorded in that particular
period under accrual method even if the transactions would not generate any cash flow.
Though, the cash basis method is very simple and it is very easy to record the transactions
under this method, it does not reflect the actual financial position of the business. Hence, all
the main accounting standard boards, like International Accounting Standard Board (IASB),
Financial Accounting Standard Board (FASB) etc., prefer accrual basis method for recording
transactions and preparing financial reports. The major accounting standards, such as IFRS or
GAAP, have been constructed on the basis of accrual method (Marshall 2016).
As per the accrual method, the business firms have to record all the revenues in the
year, in which it is generated and recognized. It should also exhibit the expenses in the
period, on which the benefits of the expenses are consumed. If any part of the recognized
revenue is not collected in cash or any other means, then it should be treated as accrued
revenue and considered as asset of the business. Whereas, if the business consumes the
benefit of any expense in a specific period, but does not pay for the expense fully, then the
unpaid amount is classified as accrued expenses and recorded in the liability section of the
balance sheet for that specific period (Bushman et al. 2016).
It has been noticed that almost all the large business houses can neither collect all the
revenues nor pay the expenses for a particular period within that period. Therefore, as per
IFRS and AASB guidelines, the firms record such uncollected revenues and unpaid expenses

3INTRODUCTION TO FINANCIAL ACCOUNTING
as accrual items in their financial reports to exhibit the fair and proper financial performance
as well as, financial position of the businesses (Goncharov and Jacob 2014).
JB Hi-Fi is a renowned Australian company, which manufactures electronic
appliances and accessories. It follows the guidelines of AASB and IFRS to maintain its
accounting records and prepare the financial statements accordingly. The balance sheet of the
company does not contain any classified group for accrual items. However, both the current
asset and current liability includes items, such as, other current asset and other current
liabilities. Hence, it can be concluded that, being a large company, JB Hi-Fi might have some
accrued revenue and expenses and the following items would have effected by the adjusting
entries for accruals:
 Revenue
 Other Income
 Sales & Marketing Expenses
 Occupancy Expenses
 Administration Expenses
 Other Expenses
 Finance Costs
From further analysis of the financial notes, provided in the annual report, it has been
observed that the other current asset does not have any accrued income. However, the other
current liabilities incorporate lease accruals. Hence, it can be stated that the adjusting entries
for accruals have majorly effected the lease expenses, which is one of the finance costs
(Jbhifi.com.au. 2018).

4INTRODUCTION TO FINANCIAL ACCOUNTING
Reference:
Jbhifi.com.au. (2018). Cite a Website - Cite This For Me. [online] Available at:
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed 25 Jan.
2018].
Bushman, R.M., Lerman, A. and Zhang, X., 2016. The changing landscape of accrual
accounting. Journal of Accounting Research, 54(1), pp.41-78.
Goncharov, I. and Jacob, M., 2014. Why do countries mandate accrual accounting for tax
purposes?. Journal of Accounting Research, 52(5), pp.1127-1163
Marshall, D., 2016. Accounting: What the numbers mean. McGraw-Hill Higher Education.