Question

a) Why is the accrual basis of accounting generally preferred over the cash basis?

b) What is a prepaid expense and where is it reported in the financial statements?

c) What type of assets requires adjusting entries to record depreciation?

d) What contra account is used when recording and reporting the effects of depreciation? Why is it used?

Answer 1

Accrual accounting is generally preferred because it gives a fairer picture of the business' real obligations, including those transactions that have been committed to but not yet completed. In accrual accounting both credits and debits are booked as soon as they are created; for example, when you bill a customer, that amount is credited to accounts receivable and is treated as earned, although not yet received. Similarly, money committed to a purchase is considered spent when committed.

B) Amount that we have paid in advance for the future expect ed expenses We will show this as an asset in balance sheet till we incur total advance amount

C)All depreciable fixed assets requires depreciation entries

D)The contra account that is used when recording and reporting the effects of depreciation is called amortization of assets. This account is used to reduce the dollar amount of the asset periodically over time to bring assets to current costs.