Explain the accrual basis of accounting and explain the reasons for adjusting entries. Must be 175...

Explain the accrual basis of accounting and explain the reasons for adjusting entries. Must be 175 to 200 words

Expert Solution

The accrual basis of accounting completely ignores cash flows. Under the accrual basis of accounting, revenues are reported on the income statement as and when they are earned. Expenses are reported as and when they are incurred. Expenses are matched with revenues utilizing the matching concept. The timing of cash inflow or cash outflow is irrelevant. This is in contrast to cash basis of accounting where sole logic is cash flow timing. The accrual basis of accounting represents true and fair financial picture.

Adjusting entries are generally made when the books of accounts are closed i.e. at the end of the month, quarter or year. This is done so that the financial statements correctly represent the revenues earned and the expenses incurred during the accounting period. The reasons for adjusting entries are mentioned below:

- to recognize revenue earned but not recorded.

- an expense incurred but not recorded.

For example, if a company has paid insurance premium for six months, five months worth of insurance premium will have to be transferred to prepaid expense at the end of the month. This will represent the accurate expenditure.

ekkarill92 answered 1 year ago

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