Question

Explain the accrual basis of accounting and explain the reasons for adjusting entries.

Answer 1

Accrual basis of accounting

Transcations are recorded in the period in which the events occur

Revenues are recognized when earned, rather than received and in the same way

Expenses are recognized when incurred, rather than paid

Reasons for adjustment entries

This entries are recorded at the end if accounting period to adjust income and expense account by complying the accrual concept of accounting

Not all entries recorded at the end of accounting period are adjusting entries

Reasons are

Accural , prepayment, non cash

Accruals are revenues are not yet received nor recorded and expenses not yet paid nor recorded

Prepayments are revenues received in advance and recorded as liabilities and expenses paid in advance and recorded as asset.

Noncash items are depreciation, allowance for doubtful debts etc,.