Under the accrual basis accounting, revenues and expenses are recognized by the following principles:
- Revenue recognition: Revenue is recognized when both of the following conditions are met: Revenue is earned and Revenue is realized or realizable.
- Expense recognition: Expense is recognized in the period in which related revenue is recognized (this is also known as the Matching Principle).
Respond to one or more of the following in a minimum of 175 words:
- Discuss when the requirements of the revenue recognition principle and the expense recognition principle are usually met. Give an example.
- What is the purpose of a trial balance? If the debits equal the credits in the trial balance, will the financial statements be error-free? Why or why not?
- What are the differences in the cash basis and the accrual basis of accounting? Which is required by GAAP? Why?