Using accrual accounting, expenses are recorded and reported only
A) When they are incurred, whether or not cash is paid.
B) When they are incurred and paid at the same time.
C) If they are paid before they are incurred.
D) If they are paid after they are incurred.
Using accrual accounting, expenses are recorded and reported only when they are incurred, whether or not cash is paid. These types of expesnes are also called as Accrued Expenses. In Accrual Accounting, Accrued Expenses are expenses that are recognized when incurred but not yet paid. Cash is not yet earned or paid when revenues or expenses are incurred. Revenues and expenses are recorded during the period in which they are incurred in accrual accounting. A company’s Accrued Expenses become its liabilities for future cash payments since they are incurred before they are paid. This is why Accrued Expenses are also known as Accrued Liabilities.
For Example : A company might pay its utility bill for February in March, or deliver its product in May and receive payment in June.
Both generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) advocate using the accrual basis of accounting. According to both frameworks, revenue or expense transactions are accounted for when there is no receipt of cash or payment to trigger the recording of the transaction.
Advantage of Accrual Accounting: In the accrual method of accounting, revenue and expenses are recognized consistently over time, and investors think it is therefore the most efficient method of determining a company’s financial position, cash flows, and results of operations. Specifically, it supports the matching principle, under which revenues and all associated costs should be recorded in the same reporting period; this should enable businesses to see how much profit or loss they are making for each specific operation within that reporting period.
Disadvantage of Accrual Accounting : One significant problem with the accrual basis of accounting is that it can identify profits even when the associated cash inflows have yet to occur. In such a situation, it may result in a firm that is supposedly profitable but was unable to raise enough cash to operate, and which therefore went bankrupt despite its reported level of profitability. As a result, you should pay close attention to a business’ cash flow statement, which shows cash flows in and out of the business.
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