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In accounting, a basis of accounting is a method used to define, recognise, and report financial transactions. [1] The two primary bases of accounting are the cash basis of accounting, or cash accounting, method and the accrual accounting method. A third method, the modified cash basis, combines elements of both accrual and cash accounting.
The cash method of accounting has historically been one of the four methods of recognizing revenues and profits on contracts, the other ones being the accrual method, the completed-contract method and the percentage-of-completion methods.
In accounting, 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. The revenue recognition principle is the basis of making adjusting entries that pertain to unearned and accrued revenues under accrual-basis accounting .
Some firms operate on the cash method of accounting which can often be simple and straightforward. Larger firms most often operate on an accrual basis. Accrual basis is one of the fundamental accounting assumptions and if it is followed by the company while preparing the Financial statements then no further disclosure is required.
Two types of balancing accounts exist to prevent fictitious profits and losses that might arise when cash is paid out in different accounting periods than when expenses are recognised. According to the matching principle in accrual accounting, expenses are recognised when obligations are incurred, regardless of when cash is paid. Cash can be ...
The trial balance, which is usually prepared using the double-entry accounting system, forms the basis for preparing the financial statements. All the figures in the trial balance are rearranged to prepare a profit & loss statement and balance sheet. Accounting standards determine the format for these accounts (SSAP, FRS, IFRS). Financial ...
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