Q. Explain accrual basis of accounting?
In certain circumstances companies may perhaps use the cash basis for income tax purposes. All through the text we use the accrual basis of accounting which matches expenses incurred and revenues earned because most companies use the accrual basis. The accrual basis of accounting is familiar with revenues when sales are made or services are performed regardless of when cash is received. Expenses are familiar as incurred whether or not cash has been paid out. For example suppose a company performs services for a customer on account. Even though the company has received no cash the revenue is recorded at the time the company performs the service. Afterwards when the company receives the cash no revenue is recorded because the company has already recorded the revenue. In the accrual basis adjusting entries are needed to bring the accounts up to date for unrecorded economic activity that has taken place.