In accounting when revenues and expenses are accounted for on cash received and cash paid basis, the method is called cash basis accounting. Small enterprise, professional persons like doctor, lawyer, small accounting firms and other individual taxpayers may use cash basis accounting for income tax purposes.
Most of the companies use the accrual basis of accounting where revenue is recognized when it is earned
and expenses are recognized in the period those are incurred, without regard to the time of receipt or payment of cash. In this method the principle of recognition of revenue and the matching rule are followed. Accrual accounting consists of all the techniques developed by accountants to apply the matching principle.
Most of the companies use the accrual basis of accounting where revenue is recognized when it is earned
and expenses are recognized in the period those are incurred, without regard to the time of receipt or payment of cash. In this method the principle of recognition of revenue and the matching rule are followed. Accrual accounting consists of all the techniques developed by accountants to apply the matching principle.
This is done in two ways-
1) By recognizing revenues when earned and expenses when incurred and
2) By adjusting the accounts at the end of accounting period.
1) By recognizing revenues when earned and expenses when incurred and
2) By adjusting the accounts at the end of accounting period.
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