Question

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):

Name and Define one type of adjusting entry where cash is paid (or received):

Adjusted Trial balance:

Answer 1

In accrual basis of accounting revenues are reported when they are earned and expenses are recorded as an when they are incurred regardless of the fact that payment has been received/paid or not.

Example of accrual basis-

For goods sold on credit, revenue is recognised at the time of sale regardless of the fact that cash has not been received.

The journal entry is as follows

Debtor's a/c Dr

To sales a/c

Again, when the cash is received from customer, the following entry is made

Cash A/c Dr

To debtor's a/c

According to the Matching Principle all expenses must be matched to the revenues they helped to earn in an accounting period.

Example of matching principle:

In the income statement, the credit side represents the revenues earned during the accounting period, and the debit side represents all the expenses that were incurred in earning those revenues.