Chapter3Accounting Cycle（(II)Accrual-basis AccountingConcepts of Accrual-basis AccountingAdjusting the AccountsPreparing the Adjusted Trial Balance
Chapter 3 Accounting Cycle (Ⅱ) Accrual-basis Accounting Concepts of Accrual-basis Accounting Adjusting the Accounts Preparing the Adjusted Trial Balance
Accrual-basis AccountingCash-basis AccountingAccrual-basis Accounting
Accrual-basis Accounting Cash-basis Accounting Accrual-basis Accounting
These two bases differ in the manner in whichthey deal with the issue of when to recognizerevenues and expenses.The Cash Basis focus is, as its name implieson the flow of cash. That is to say, whenever cashis collected,revenue is recognized ashaving beenearned. A similar basis for the recognition ofexpenses is used, namely whenever cash is paidout (disbursed) the related expense is recognizedashavingbeenincurred
These two bases differ in the manner in which they deal with the issue of when to recognize revenues and expenses. The Cash Basis focus is, as its name implies, on the flow of cash. That is to say, whenever cash is collected, revenue is recognized as having been earned. A similar basis for the recognition of expenses is used, namely whenever cash is paid out (disbursed) the related expense is recognized as having been incurred
This basis is simple and straight forwardMany smaller business entities use it. However,it has many flaws that interfere with the realmeasurement of an entity's economic activitiesThose activities are measured in terms of theshortwillbe innotthough theyrun.asexistence in the future and thus will not. in thebenefitfromfuture,currentanyreceiveactivities
This basis is simple and straight forward. Many smaller business entities use it. However, it has many flaws that interfere with the real measurement of an entity's economic activities. Those activities are measured in terms of the short run, as though they will not be in existence in the future and thus will not, in the future, receive any benefit from current activities
The Accrual Basis does take into accountthe fact that a business entity's life willextend the future, beyondtheintocurrentperiodtest under thisTherefore, the realbasis ofaccounting is the determination of when revenuesare to be recognized, independent of any cashflow
The Accrual Basis does take into account the fact that a business entity's life will extend into the future, beyond the current period. Therefore, the real test under this basis of accounting is the determination of when revenues are to be recognized, independent of any cash flow
The test for revenues is when it is earned. Thatgives caused to a discussion as to when a businessactuallyearnsitsrevenueofaRevenueresultgeneratedas1Sabusiness's performance in an economic exchange.That is to say a business enters into a contractualfor a to exchange a performanceagreementconsideration, which will ultimate cumulate in thethatWhenof cash.itcompletesreceiptperformance, it is entitled to receive that cash, ithas earned it as revenue. At that time revenue isrecognized
The test for revenues is when it is earned. That gives caused to a discussion as to when a business actually earns its revenue. Revenue is generated as a result of a business's performance in an economic exchange. That is to say a business enters into a contractual agreement to exchange a performance for a consideration, which will ultimate cumulate in the receipt of cash. When it completes that performance, it is entitled to receive that cash; it has earned it as revenue. At that time revenue is recognized
Thefollowsrecognition of expensesinaTheMatchingConceptsimilarinmanner.allmatchit clearthatmakesaccountingwethethat they helptoagainstrevenueexpensesgenerate.Expenses then follow a similar pattern to thatofrevenue. When expenses are matched in thisare said to have been incurred. Attheymanner,thatthey mustbe recognizedasanmoment.theThisrecognition is independent ofexpense.forCashtheisactualnot criteriapayment.recognition
The recognition of expenses follows in a similar manner. The Matching Concept in accounting makes it clear that we match all expenses against the revenue that they help to generate. Expenses then follow a similar pattern to that of revenue. When expenses are matched in this manner, they are said to have been incurred. At that moment, they must be recognized as an expense. This recognition is independent of the actual payment. Cash is not the criteria for recognition
A case of Accrual-basisAccounting
A case of Accrual-basis Accounting
For example, a companyhad twotransactions during May,1998May 1,paid the two months' rentals inadvancewith $5,000:May30,soldmerchandisesforthepriceof$7.000, at the cost of $4,000,and the buyerwould pay the item at the next month
For example, a company had two transactions during May,1998 May 1,paid the two months’ rentals in advance with $5,000; May 30, sold merchandises for the price of $7,000, at the cost of $4,000,and the buyer would pay the item at the next month
UnderCash-basisRevenue:so:Expenses:$5,000Net income or loss:0- 5,000= -$5.000UnderAccrual-basisRevenue:$7,000Expenses:2,500+ 4,000= $6,250Net income or 1oss:7,000- 6,250= $750
Under Cash-basis: Revenue:$0: Expenses:$5,000 Net income or loss:0- 5,000= -$5,000 Under Accrual-basis: Revenue:$7,000 Expenses:2,500+ 4,000= $6,250 Net income or loss:7,000- 6,250= $750