Accrual basis accounting records the effect of each transaction as it occurslong dashthat is, revenues are recorded when earned and expenses are recorded when incurred. Most businesses use the accrual basis over the cash basis . The accrual basis of accounting provides a better picture of a business's revenues and expenses. It records revenue only when it has been earned and expenses only when they have occurred. Under accrual basis accounting, it is irrelevant when cash is received or paid.The timing and recognition of revenues and expenses is the key difference between the cash basis and accrual basis method of accounting. This difference can be explained by understanding the time period concept and the revenue recognition and matching principles.Time period concept:The time period concept assumes that a business's activities can be sliced into small segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.Revenue recognition principle:The revenue recognition principle tells accountants the following things: (1) when to record revenuelong dashthat is, when to make a journal entry for a revenue, and (2) the amount of revenue to record.Matching principle:The matching principle guides accounting for expenses and ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period.The end-of-period process begins with the unadjusted trial balance. The unadjusted trial balance amounts, however, are incomplete because they omit various revenue and expense transactions. Accrual basis accounting requires the business to review the unadjusted trial balance and determine if any additional revenues and expenses need to be recorded. Are there revenues that the company has earned that haven't been recorded yet? Are there expenses that have occurred that haven't been journalized?An adjusting entry is completed at the end of the accounting period and records revenues to the period in which theyare earned and expenses to the period in which they occur. Adjusting entries also update the asset and liability accounts. Adjustments are needed to properly measure two things:1. Net income (loss) on the income statement2. Assets and liabilities on the balance sheet.
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Expense, Generally Accepted Accounting Principles, Alston