Unlike cash basis accounting that recognizes revenue when cash is received and expense is recognized when cash is paid, accrual accounting follows rules where revenue is recognized when earned, and expenses are recognized when they are incurred. This form of accounting conforms to generally accepted accounting principles (GAAP) and because accrual basis accounting is simply the posting of income and expenses as they occur, rather than deferring the postings until a later date, this form of accounting is the favored method by most businesses. More accurate financial evaluation of actual profitability and performance is achieved by eliminating accounting entry timing disparity. A key element of accrual accounting is the matching principle, which along with revenue recognition rules is the foundation to accrual based accounting.
The GAAP matching principle allows companies to recognize revenue, and recognition of the related expenses, as they occur. This results in a more accurate analysis of current financial records at any point during the accounting period. A representative way to illustrate this process is by looking at uncollectable accounts receivable. When a sale is recognized to a credit worthy customer the transactional entry is a debit to accounts receivable on the balance sheet, and a debit to sales on the income statement. A typical entry would be: Continue reading ‘Accounting Matching Principle – Allowance for Doubtful Accounts’ »