Question

Your company orders and receives supplies in January, pays for them in February, provides services that use those goods up in March, and is paid by customers in April. Use accrual basis of accounting_____________

Answer 1

In the scenario provided, the company would use the accrual basis of accounting to recognize expenses in January when supplies are received and liabilities in February when payment is made. Revenues would be recorded in March when services are provided, and finally, cash received in April would be recorded then.

Step-by-step explanation:

Using the accrual basis of accounting, the recognition of transactions is based on when economic events occur rather than when cash transactions happen. In January, when the supplies are received, the company would record an expense for the use of these goods, and simultaneously would also record a liability on its balance sheet, as the company has an obligation to pay for these supplies. This is an example of accruing an expense. Then, in February, when payment is made, the company would decrease its liabilities and reduce its cash or cash equivalents.

When the company provides services in March using those supplies, it would record revenues earned, even though payment has not yet been received; this is an example of accruing revenue. Lastly, in April, when the company is paid by the customers, it will increase its cash and decrease its accounts receivable. These steps ensure financial statements reflect the company's financial position more accurately, as they show expenses and revenue when they are incurred, not merely when cash is exchanged.