3. It is compliant with GAAP. However, the approach does not meet needs of public companies. Aside from easier planning, this accounting method can help with reducing your tax burden by issuing invoices at the start and the end of the year. The accrual basis of accounting is the concept of recording revenues when earned and expenses as incurred. C. Prepaid expenses are expenses paid in advance of its usage. This enables some small firms to meet record-keeping and reporting needs without a trained accountant or accounting software. The definitional problem arises from cash vs., accrual accounting, or the principle of matching costs with revenues. The following statements are true EXCEPT A. B. D. Prepaid revenues are revenues received for services rendered in the previous accounting period. Accrued Revenues. Accrual accounting is necessary for complex organisations, of course, but, where accruals and estimates have a considerable degree of uncertainty as to amount or timing, cash accounting would seem to come closer to economic realism. With expenses and revenue matched, accrual accounting allows for financial statements that are unaffected by cash timing in business negotiations. Accrued revenues are recorded as receivables on the balance sheet, and are unpaid proceeds from the delivery of a commodity that will be paid by cash at a later date. Accuracy level is higher: Unlike cash accounting, accrual accounting follows a double-entry system. However, under the modified accrual basis, GAAP provided modifications to the general rule in the areas of inventories and prepaid items. However, the two terms have distinct characteristics in accounting and economics. Cash basis accounting is simpler than accrual accounting because it has only two kinds of transactions—cash inflows and outflows. Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. As a result, we can see how one account is reduced, and another account has increased. Under accrual accounting, expenditures are recognized as soon as a liability is incurred regardless of the timing of related cash flows. It increases the accuracy level of accounting, and later on, during an audit, things get easier. That means one account is debited and another account is credited. Accrued expenses are listed in the current liabilities section of the balance sheet because they represent short-term financial obligations. Accrued expenses are expenses incurred but not yet paid. What are Accrued Expenses? What is the Accrual Basis of Accounting? 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