Accounting: Accrual, Cash Basis, and Adjusting Entries Concepts

Accural Basis accounting

- recorded when cost is used to help generate revenue

- creates time difference between...

* cash-in flows & related revenue

*cash-out flows & related revenue

Cash Basis

- record revenues when we receive cash

-record revenues when we pay cash

*not allowed for financial reporting purposes

Pre-paid expenses

When the company pays cash to acquire an asset that is not used until later

-

deferred revenue

when company receives cash in advance from customer

*products & services won't be paid until later

*creates liability

Accrued expenses

When the company incurs costs in the current period

*The company hasn't paid the cost yet

Adjusting entries

needed for...

-cash flows or obligations before revenue or expense (pre-payment)

-cash flows occur after revenue (accrual)

Closing entries

transfers balances of all temporary accounts

- reduces balances of these temporary accounts to zero to prepare them for the next period

post-closing trial balance

A list of all accounts and their balances at a particular date

-helps verify that we prepared and posted closing entries correctly