Question

Why must one understand accrual basis accounting and how does this process play a huge role in the adjusting entry process?

Answer 1

Accural accounting concept explain that expenses and revenues should be recorded in the books when it is occured or earned not when it's received or paid. This concept hepls us to derive true net income that has been earned by the business in a financial year. For example salary expense should be recorded when it has been expensee not when it paid. It's help us to adjusting entries few example is follows.

Salary which has not been yet paid should be recorded as per accural accounting concept like

Salary expense A/c Dr

Salary payable

Same like if salary paid in advance then

Prepaid salary expenses A/c Dr

Cash

And prepaid should be recorded as an assets in the balance sheet until it has not been expended.

Same thing happens when we recorded accrued income

For example rent earned but not received than

Rent receivable Dr.

Rent revenues

Or for deffred rent revenue when rent recieved in advance

Cash A/c. Dr.

Deferred rent revenue

Should be recorded as liability in balance sheet until it's has not been earned.

So we can say accural concept has huge impact on financial statements and adjusting entries.