To Fill In The Blanks
TO FILL IN THE BLANKS As I was reading the text, there were a few terms and concepts that I believe may need a more in depth explanation. It is not my intention to repeat what is in the text, but to enhance upon what the text presents. With that in mind, I would like to fill in the blanks where I believe they exist. I will use terms and concepts that you have learned in the text, and add a few additional ones. It is by understanding the accounting terms and concepts that you can better understand accounting. To get a true picture of the profit earned during an accounting cycle, the MATCHING PRINCIPLE is used. Either the CASH ACCOUNTING or ACCRUAL ACCOUNTING system can facilitate the Matching Principle, but the Accrual Accounting system was specifically developed to do so. THE MATCHING PRINCIPLE: This is the principle that requires all revenues to be recorded in the period in which the sale is made or service provided, and to match all expenses with the sale or service they help to generate in that same period. This recording is done in the accounting period in which the sale took place, irrespective of when cash is actually received or paid out. CASH ACCOUNTING: This is very simple to use, because you record when you receive money from a customer or other payer. And you record when you pay an expense with cash, credit card or a check. When money comes in or goes out, it's recorded and recognized at that moment for tax purposes. ACCRUAL ACCOUNTING: This system records revenue and expenses in the period in which they are earned or incurred regardless of whether cash is received or disbursed in that period. This is the accounting basis that generally is required to be used in order to conform to generally accepted accounting principles (GAAP) in preparing financial statements for external users. Most small business in the United States us a CASH ACCOUNTING system if they do not have to report earnings to any entity, except the Internal Revenue Service. This is the simplest to use, especially when the business is a proprietorship and the time between paying for expenses and receiving payment for goods or services is almost immediate.