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

1. As per the matching principle, the expense should be recorded in the same period in which corresponding revenue is earned.

2. Prepaid expenses are recorded as follows:-

Rent paid for the period 1st April to 31st March at $1,200. Books close on 31st December.

Therefore, from 1st April to 31st December, rent = 1200*9/12 = $900.

It will be shown as expenditure for the year ending 31st December.

Prepaid expenses = 1200*3/12 = $300. It will be the current asset for the year ending 31st December.

This prepaid expenditure will be expenditure in the next year.

3. The cash basis of accounting is that accounting where expenditures and incomes that are incurred in cash are only recorded.

Accrual basis of accounting records expenditures and income even if cash is not received but they are earned or due to be paid. It implements the matching principle of accounting.

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