Accrual versus Cash-Basis Accounting Methods: An Agency-Theoretic Comparison

Author

Young Koan KWON, Singapore Management UniversityFollow

Publication Type

Journal Article

Publication Date

1989

Abstract

In an agency setting with moral hazard, this paper analytically demonstrates that accrual accounting is superior to cash-basis accounting (subject to costs). The main reason is that accrual accounting information more fully reflects the overall effects of managerial actions or efforts on future cash flows than cash flow realizations in any given period. As a result, accrual accounting information is more efficient than cash-basis accounting information for both motivating managers to expend efforts and sharing risks under moral hazard.

Discipline

Accounting | Corporate Finance

Research Areas

Financial Performance Analysis

Publication

Journal of Accounting and Public Policy

Volume

8

Issue

4

First Page

267

Last Page

281

ISSN

0278-4254

Identifier

10.1016/0278-4254(89)90015-x

Publisher

Elsevier

Citation

KWON, Young Koan. Accrual versus Cash-Basis Accounting Methods: An Agency-Theoretic Comparison. (1989). Journal of Accounting and Public Policy. 8, (4), 267-281.
Available at: https://ink.library.smu.edu.sg/soa_research/699