Question

Describe the interrelationship between the matching principle and accrual accounting Describe the impact of a $5,500 accrued wage expense on the financial statements of a business.

Answer 1

The Interrelation between the matching principle and accrual accounting

Accrual basis of Accounting

The accrual basis of accounting by which we recognize our expenses when we become liable for them, that is, when they are incurred.

Viceversa it happens in the case of income when we arn it. In either case, recognition does not wait upon the payment or receipt of cash. Accrual accounting is preferred over the simpler cash method of accounting. In the context of federal taxation, the Internal Revenue Service requires accrual accounting for most businesses.

Matching Concept

The matching concept is not an alternative to accrual accounting but an outgrowth of it. The matching principle requires the matching of expenses with corresponding revenues. For example, a company that pays commissions to its sales force would match the payment of commissions with the revenues from sales: both are recognized in the same period. For instance, Christmas season sales in December 2010 might result in sales commissions that are paid in January 2011. Under the less sophisticated cash system, this would mean that the the sales revenue is booked to the fourth quarter of 2010, and the expense is booked to the first quarter of 2011. Matching applies both in the context of tax accounting and financial accounting.

The principle behind the matching concept is the concept of double-entry bookkeeping. Basic accounting convention requires that every journal entry have an offset. Every entry of $100 on the debit side of a journal will occasion one or more entries on the credit side, such as when materials purchased for inventory are matched with the cash expended to purchase them.

Describe the impact of a $5,500 accrued wage expense on the financial statements of a business.

The accrued wage expense is paid after being recorded on the books.Every adjusting entry for accrued wages debits an expense account ie wages increasing the expenses on the income statement and reducing the net income and credits a payable accounts which is wages payable increasing the liabilities in the balance sheet.