Methods Of Accounting

Question 1

Cash basis of accounting

Answer 1

• transactions only recorded when cash changes hands
• revenue recognised once cash is received
• expenses only recorded when cash is paid out

Question 2

Issue with cash basis of accounting

Answer 2

• not accounting payables and receivables which is important
• doesn’t accurately show business performance
• cash basis is not allowed under GAAP or IFRS

Question 3

Accruals basis of accounting

Answer 3

• revenue recognised as earned
• expenses recognised as incurred
• applies matching principle => revenue, and all expenses incurred in order to generate that revenue, need to be recognised in the same accounting period

Question 4

Revenue recognition principle:

Answer 4

• revenue recognised when earned - not received
• deferred revenue = payment made in advance for good to be supplied in the future
• accrued revenue = service provided before payment