Accrual basis accounting.docx - Accrual basis accounting...

Accrual basis accounting
Revenues are recognized when they are earned and expenses when they are incurred
to generate revenues.
i.e., record revenues when goods and services are provided to customers; and
record expenses in the period the cost is used to benefit the company
Matching principle: costs incurred to generate revenues be recognized in the
same period—a matching of costs with benefits
Accrual-basis is preferred:
Better indication of future performance
more relevant to external users’ investment decisions (see the example in the next
slide)
Generally, all companies use accrual-basis accounting (except small ones that are not public)
How does accrual-based accounting work?
During the period – record transactions.
End of the period
1. Record adjusting entries arising from accrual basis accounting
2. Prepare financial statements
3. Close the books
Adjust entries – Needed because some events occurred during the year but were not recorded