Completely and Precisely Define the Following Terms The accr

Completely and Precisely Define the Following Terms

The accrual basis of accounting:

The Matching principle:

Name and define one type of adjusting entry where cash is paid (or received) BEFORE Expenses or Revenues are Recognized:

Name and Define one type of adjusting entry where cash is paid (or received) AFTER Expenses or Revenue are Recognized:

Adjusted Trial balance:

Solution

The accrual basis of accounting

Under the accrual basis of accounting, revenues are reported on the income statement when they are earned. (Under the cash basis of accounting, revenues are reported on the income statement when the cash is received.) Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The concept of accrual accounting provides better measures to the profitability of a company during a specific period.

The Matching principle:

The matching principle requires that revenues and any related expenses be recognized together in the same period. This is one of the most essential concepts in accrual basis accounting, since it mandates that the entire effect of a transaction be recorded within the same reporting period.

Adjusting entry where cash is paid BEFORE Expenses is Recognized

A deferred expense is a cost that has already been incurred, but which has not yet been consumed. The cost is recorded as an asset until such time as the underlying goods or services are consumed; at that point, the cost is charged to expense. Some deferred expenses are also called prepaid expenses.

Example: Prepaid rent is rent paid prior to the rental period to which it relates, so the tenant should record on its balance sheet the amount of rent paid that has not yet been used. Rent is commonly paid in advance, being due on the first day of that month covered by the rent payment.

Prepaid Rent Accounting

Debit

Credit

Prepaid Rent

$x,xxx

To  Accounts payable

$x,xxx

Accounts payable

$x,xxx

To Cash

$x,xxx

Adjusting entry where cash is paid AFTER Expenses is Recognized

Accrued expenses are expenses that have occurred but are not yet recorded through the normal processing of transactions. Since these expenses are not yet in the accountant\'s general ledger, they will not appear on the financial statements unless an adjusting entry is entered.

Example Commission. A salesman earns a 5% commission on sales shipped and recorded in January. The commission of $5,000 is paid in February. You should record the commission expense in January.

Accrued Commission Expense Accounting

Debit

Credit

Commission expense

5,000

To Accrued expenses

5,000

Accrued expenses

5,000

To Cash

5,000

Adjusted Trial balance

An adjusted trial balance is a listing of all the account titles and balances contained in the general ledger after the adjusting entries for an accounting period have been posted to the accounts.
The adjusted trial balance is an internal document and is not a financial statement. The purpose of the adjusted trial balance is to be certain that the total amount of debit balances in the general ledger equals the total amount of credit balances

	Debit	Credit
Prepaid Rent	$x,xxx
To  Accounts payable		$x,xxx
Accounts payable	$x,xxx
To Cash		$x,xxx