Under the accrual basis of accounting
O The ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared.
O Profit is calculated by matching cash outflows against cash inflows.
O Cash must be received before revenue is recognised.
O Events that change an entity's financial statements are recognised in the period they occur rather than in the period in which cash is paid or received.
Under the accrual basis of accounting:
O Events that change an entity's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
This means that revenue is recognized when earned, regardless of when cash is received, and expenses are recognized when incurred, regardless of when cash is paid out. The ledger accounts are adjusted to reflect these accruals, not to convert to a cash basis, and profit is calculated by matching revenues with the related expenses, not solely based on cash flows.
