financial statements are prepared on the accrual basis of accounting, which means that assets and liabilities are recorded when they are committed to, and revenue and expenses are recorded when they are incurred. The reason for emphasizing on accrual basis is that incomes and expenses should be reported in the financial period in which they have been earned and incurred instead of the period in which they are received or paid respectively. If we do not prepare the financial statements on accrual basis then we will not able to separate the two distinct events by looking at the financial statements