Acrual vs Cash Basis Accounting
Acrual Basis Accounting
1. Transactions recorded in the periods in which the evens occur.
2. Revenues are recognized when earned, rather than when cash is received.
3. Expenses are recognized when incurred, rather than when paid.
Cash Basis Accounting
1. Revenues are recognized when cash is received.
2. Expenses are recognized when cash is paid.
3. Cash basis accounting is not in accordance with generally accepted accounting principles (GAAP).
The Basics of Adjusting Entries
Adjusting entries make it possible to report correct on the balance sheet and on the income statement.
A company make adjusting entries every time it prepares financial statement.
~ Revenues, recorded in the period in which they are earned.
~ Expenses, recognized in the period in which they are incurred.
~ Adjusting entries, needed to ensure that the revenue recognition and matching principles are followed.
Types of Adjusting Entries
a. Prepaid Expenses
Expenses paid in cash and recorded as assets before they are used or consumed.
b. Unearned Revenues
Revenues received in cash and recorded as liabilities before they are earned.
a. Accrued Revenues
Revenues earned but not yet received in cash or recorded.
b. Accruel Expenses
Expenses incurred but not yet paid in cash or recorded.