In cash basis of accounting, revenues are stated on the income statement in the period that the cash was received from the clients. Similarly, the expenses are also recorded on the income statement at the time customers are making cash payment (Warren, Reeve & Fess, 2009). On the other hand, the accrual system report revenues only when they are earned on the income statement. Additionally, this always occurs before the reception of cash from the clients. Moreover, expenses are recorded during the periods of their occurrence or when they expire. That is the period from the date of payment. However, the accrual system of accounting gives a better picture especially on the proceeds of the company during the periods of accounting. This is because the preparation of the income statement rely on the accrual concept to support all revenues earned and all expenses incurred during the period for the purpose of earning revenues. It also provides a better picture of the financial position of the company than the cash basis at any given time because all net worth of the enterprises are earned and the incurred liabilities will be reported.
The adjusting entries will affect the nominal accounts such as revenues, salary expense, and rent expenses. Similarly, it will also influence the real accounts like cash, accounts receivable, accounts payable as well as other debts (Rich, Jones, Mowen & Hansen, 2009). While determining the transaction of prepaid expenses, they are recorded as assets initially. However, they are expected to become expenses as the business continue to operate. An example is a prepaid insurance. The unearned revenues can be recognized since they are the transactions that have been recorded initially as liabilities but are expected to change to revenues through the operations of the firm. Lastly, the accrued expenses can be determined since they have not been recorded in the respective accounts. An example is the accrued wages.
References
Rich, J., Jones, J., Mowen, M., & Hansen, D. (2009). Cornerstones of Financial Accounting, Current Trends Update. Cengage Learning.
Warren, C., Reeve, J., & Fess, P. (2009). Financial accounting (8th ed.). Pennsylvania State University: South-Western, 2001.
