Accrual Accounting Essay

5. Financial statements are prepared under the accruals basis of accounting rather than on cash basis. Under accruals basis of accounting, an entity must account for the prepaid expenses, prepaid revenues, accrued expenses and accrued revenues. Discuss in detail each type of the transactions and provide example in the discussion.

A financial statement or report is a formal record of the financial activities and position of a business, other entity, or person.

Relevant financial information is presented in a structured manner and in a form easy to understand. They have include basic financial statements, followed by a management discussion and analysis. There have four types of Financial Statements that are Income Statement, Statement of Financial Position, Statement of Changes in Equity and Cash Flow Statement.

The accruals need to be added via adjusting entries so that the financial statements report these amounts. An accrual allows an entity to record expenses and revenues for which it expects to receive cash or expend cash respectively in a future reporting period. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent non-cash-based assets and liabilities used in accrual-based accounting. These types of accounts include accounts payable, accounts receivable, deferred tax liability, goodwill and future interest expense. It is nearly impossible to generate financial statements without using accruals, unless the cash basis of accounting is used. The term accrual also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic or accounting