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Accounting Case

Essay by   •  February 28, 2012  •  Essay  •  319 Words (2 Pages)  •  1,342 Views

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This is th beginning of new things. I like math but accounting is a challenge. I am here to learn all I can to enhance my knowledge of the accounting world. This will be an adventure for me in the world of business. Accrual basis accounting is a method that measures the performance and position of a company by recognizing economic events regardless of when the cash transactions take place. The idea of accrual basis accounting is that economic events are recognized by matching revenues to expenses at the time the transaction happens and not when payment is made. The accrual basis accounting method allows the current cash inflows and outflows to be combined with future expected cash inflows and outflows which will give a more accurate description of a company's current financial condition (Investopedia, 2011).

Under the cash basis accounting method revenues and expenses are recognized at the time actual cash is received or paid out. Under the cash basis accounting method the books are affected only when exchange of cash has occurred; therefore this method does not give an accurate picture of a company's financial condition like the accrual basis accounting method. Cash basis accounting is easier and cheaper to perform than accrual basis accounting but it can make obtaining financing more difficult due to its inaccuracy (Investopedia, 2011).

Prior to preparing financial statements a company must first enter adjusting entries. These entries ensure the revenue recognition and the expense recognition principles are followed. Certain transactions made to accounts such as supplies and wages are not recorded daily because it is not efficient. Transactions to other accounts such as insurance, equipment, rent, and buildings expire with time. It is not necessary to record these transactions daily therefore it is common to for a company to enter an adjusted entry at the end of the month to account for their use (Kimmel, Weygandt, & Kieso, 2011).

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