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Cash Method of Accounting
- Used by most small businesses
- Income is recorded when cash is received and expenses are recorded when they are paid
- When cash changes hands
Accrual Accounting Method
- Revenue is recognized when it is earned through delivery of goods/services
- Payment is assured
- Expenses are recorded when they are incurred or when the business used some resource, even if expenses aren't paid yet.
- Useful b/c it shows underlying business transactions NOT just those where cash changes hands.
Accounting Period
Time frame for which results are being reported e.g. months, a quarter, or a year.
Deferred/unearned revenue
- When a company receives cash before a good has been delievered or a service has been provided.
- Known as a liability account
Realization Principle
- Revenues are recognized when they are earned and realizable.
- Does not necessarily have to be when cash changes hands
Matching Principle
Expenses should be recognized in the period in which the revenues they helped generate are recognized.
- Revenues are typically recognized when inventory is sold.
- Expenses are generally recognized at the same time.
Prepaid Expense
Businesses choosing to prepay for goods/services that will provide future benefits
- Recongized as an asset the reduced to expenses over time
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