Ensure accurate financial statements by aligning with the accrual basis of accounting.
Adjust for timing differences between the occurrence of transactions and related cash flows.
Correct financial records to reflect:
Revenue: When earned (not necessarily when cash is received).
Expenses: When incurred (not necessarily when cash is paid).
Revenues are recognized when earned, regardless of cash receipt.
Expenses are recognized when incurred, regardless of payment timing.
Revenues must be recorded in the period when goods/services are provided.
Expenses are matched with the revenues they help generate.
Initially recorded as assets.
Adjusted to reflect the portion of the expense used up during the period.
Initially recorded as liabilities.
Adjusted when the company earns the revenue by delivering goods or services.
Recognized when the company has provided services but not yet received payment.
No cash transaction has occurred yet.
Recognized when the company has incurred an expense but not yet paid for it.
Adjusted to account for the expense even if cash has not been disbursed.
Ensures that financial statements (income statement, balance sheet) reflect the correct amounts for the period.
Aligns income and expenses with the correct accounting period, providing a clearer picture of the company’s financial health.
Accurate financial data helps stakeholders (managers, investors, creditors) make informed decisions about the company’s operations.