CHAPTER 3 REVIEW OF THE ACCOUNTING PROCESS With the cash basis of. accounting, a revenue item is reported in the time period when the related. cash is received from the customer and an expense ·is recorded· in .the time period in which the related cash is paid. Cash basis financial statements. are not in conformity with generally accepted .accounting principles. . Most companies use the· accrual basis of accounting, whereby a revenue item is reported in the time period in which it is earned and an expense item is reported in the time period in which it is incurred. TIP: Adjusting entries are often required so that revenues and expenses are reflected on an accrual basis. of accounting(revenues recognized when .earned and expenses. recognized when incurred) rather than on a cash basis of accounting. Therefore,. adjusting entries reflect the accruals and .deferrals of revenues and expenses and also estimated expenses. Adjusting . entries . are simply entries required to bring account .balances up to date before financial
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