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Word Count: 852
Cost principle recognizes that transactions are recorded as they occur in the money value at that time The effect of recording these transactions at historical cost is that in both the revenue statement and the balance sheet there will be a mixture of cost incurred in various periods Accrual Principle recognizes of an expense for benefit received but not yet paid for or the recognition of revenue that has been generated but for which cash has not yet been received Under the Accrual revenue is recognized in the period in which the inflow of economic benefits can be measured reliably and expenses are recognized when the consumption of goods or services is capable of reliable measurement Net profit for an accounting period is determined by subtracting expenses recognized during the period for revenues recognized in that period An entity was organized in 1996 and received 100 000 in cash for in cash for services rendered before the end of the year Assume also that its clients were charged 20000 for services completed in 1996 for which the cash is to be received in 1997 Revenue recognized in 1996 is 120 000 which is the sum of cash received 100 000 and accounts receivable 20 000 from customers for services rendered in 1996 For expense salaries earned by employees in this period are reported as a current expense even though payment may not be made until the next period In other cases prepayment of rent for the next period and the purchase of office equipment for cash cash is paid before an expense is incurred To facilitate the preparation of the next period profit and loss statement all revenue and expense accounts are reduce to a zero balance at the end of accounting year process is also called closing the accounts only Balance sheet accounts are not closed their end of period end balance are carried forward and become the beginning
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