Accrual Basis Accounting

CASH BASIS ACCOUNTING
Under cash basis accounting, revenues are recognized when cash is received and expenses are recognized when cash is paid.
ACCRUAL BASIS ACCOUNTING
Under accrual basis accounting, revenues are recognized when revenues are earned regardless of cash receipt.
Revenues can be recognized before or after cash is received.
Expenses are recognized when related revenues are recognized. This is called the matching principle.
Financial statements are prepared using accrual basis accounting except for the statement of cash flows which is prepared by cash basis accounting.
Revenue Recognition
Revenue recognition under accrual basis accounting requires the following:
Revenue is earned
Revenue is earned when the goods are delivered or services are provided.
Revenue is realized or realizable
Realized means that cash is received from the customer. Revenue is realizable when the collection of cash is expected.
Expense Recognition
Expense recognition under accrual basis accounting is matched with when the related revenue is recognized.
The cost of goods sold is recognized in the same period when related sales revenue is recognized. Therefore, expense is matched with revenue under accrual basis accounting. This principle is named as matching principle.
Financial Statements
Generally accepted accounting principles require the application of accrual basis accounting when financial statements are prepared.
The only exception is the statement of cash flows.
To report the cash flows from operating, investing and financing activities, cash basis accounting is applied when the statement of cash flows is prepared.
Review Questions
1. Under cash basis accounting, when are revenues recognized?
Under cash basis accounting, revenues are recognized when cash is received.
2. Under cash basis accounting, when are expenses recognized?
Under cash basis accounting, expenses are recognized when cash is paid.
3. When are revenues recognized under accrual basis accounting?
Under accrual basis accounting, revenues are recognized when revenues are earned.
4. Under accrual basis accounting, when are expenses recognized?
Under accrual basis accounting, expenses are recognized when related revenues are recognized.
5. What is the name of principle that is applied when expenses are recognized under accrual basis accounting?
Matching principle


 

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