Question

Describe the matching principles in accounting. How is prepaid expense accounted for? Give an example. What is the difference between cash basis accounting and accrual basis accounting?

Answer 1

Matching Concept: Every transaction have 2 aspects and it's affect Dr. and Cr. both side, and therefore this rule says Expense should be record when that expense help to gererate revenue.

Prepaid Expense : Prepaid expense means expense which has been paid but not yet accrued. it should be shown in balance sheet. Journal of Prepaid Expense

Prepaid Expense ..................Dr.

Expense...............................Cr.

Difference between cash basis accounting and accrual basis: Cash basis accounting means transaction will be recorded when when cash received/paid for that transaction in this method Non cash transaction like Depreciation, Provision, Bad debt etc.

whereas in accrual basis all transaction are recorded when in occured or paid/received whichever is earlier. Here non cash transaction is also recorded like Depreciation, Provision, Bad debt etc.

I hope this clear your doubt.

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