Define: Generally Accepted Accounting Principles and Accrual Basis

1391 Words Dec 1st, 2012 6 Pages
Table of Contents Define the terms assets, liabilities, and equity. Are these terms related in any way? If so, how? 2 Assets 2 Liabilities 2 Owners ' Equity 2 What is the purpose of an account? What is the purpose of a ledger? Explain the following terms as they relate to a T account: 2 (a) Debit side 2 (b) Credit side 2 How is profit determined under (a) the cash basis of accounting and (b) the accrual basis of accounting? 3 Why are adjusting entries necessary? Surely they cause too much delay in preparing financial statements, and the financial effect of any entries made is immaterial in the long run.’ Respond to this criticism. 4 Compare and contrast the purposes of adjusting entries and closing entries 4 …show more content…
It is, however, simpler than the accrual basis accounting and quite suitable for small organizations that transact business mainly in cash. It can make obtaining financing more difficult due to its inaccuracy. (b) The accrual basis of accounting
A system of accounting based on the accrual principal, under which revenue is recognized when earned, and expenses are recognized when incurred.
Totals of revenues and expenses are shown in the financial statements (prepared at the end of an accounting period), whether or not cash was received or paid out in that period. Accruals basis accounting conforms to the provisions of GAAP in preparing financial statements for external users, and is employed by most companies except the very small ones (which use cash basis accounting). (200 words)
Why are adjusting entries necessary? Surely they cause too much delay in preparing financial statements, and the financial effect of any entries made is immaterial in the long run.’ Respond to this criticism.
Adjusting entries are journal entries usually made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred or Adjusting entries are accounting journal entries that convert a company 's accounting records to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a company 's financial statements.
Based on the matching principle of accrual accounting, revenues and
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