CHAPTER 4Accrual Accounting ConceptsStudy Objectives1.Explain the revenue recognition principle and the matching principle. 2.Differentiate between the cash basis and the accrual basis of accounting.3.Explain why adjusting entries are needed and identify the major types of adjusting entries.4.Prepare adjusting entries for prepayments.5.Prepare adjusting entries for accruals.6.Describe the nature and purpose of the adjusted trial balance.7.Explain the purpose of closing entries.8.Describe the required steps in the accounting cycle.1.revenue recognition principle2.matching principle♦The revenue recognition principlerequires that revenuebe recognized in the accounting period in which it is earned.A service company recognizes (records) revenue when the services are performed.4-1
♦The matching principlerequires that efforts (expenses)be matched with accomplishments (revenues).♦The critical issue is determining when the expense makes its contribution to revenue.Study Objective 2 - Differentiate Between the Cash Basis and the Accrual Basis of Accounting♦With cash basis accounting, revenueis recognized (recorded) when cash is received. Expensesare recognized (recorded) only when cash is paid. ♦Accrual basis accountingrequires accountants to adhere to the revenue recognition principleand the matching principle.