Question

Describe two accounting principle that underlines the accural- basis accounting. Give specific examples of each

Discuss how these two principles appear to conflict with each other

Answer 1

The two accounting principle that underlines the accrual basis of accounting are:

1) Matching Principle, for example, commission should be booked in the year of sales and all wages to employees are expensed in the year of use and

2) Revenue Recognition Principle, for example, sales should be booked as soon as a product has been sold or a service has been performed or rent revenue is booked without considering its actual receipt.

The contradiction of the two Principles can be gathered as:

a) The sales is being booked in an accrual year without its actual cash receipt, then a paid expense can not be matched with a due revenue.

b) If the bonus of 2017 is being declared and should be paid in first week of next year, then bonus expense should be booked in the year 2017, but we can’t match the cash with the actual expense as cash shows an inflated figure to actual expense.

c) Under matching principle we can match the revenue and expense, but the cash collected can not be matched with the revenue earned during the year. Like-wise, the expense made in a year can not be matched with the actual cash paid out for expense.

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