Which of the following supports the accrual basis of accounting? revenue recognition concept, cash concept, mathcing concept, or revenue recognition and matching concepts?
1. For each of the following items, indicate whether its amount (i) affects the bank or book side of a bank reconciliation and (ii) represents an addition or a subtraction in a bank reconciliation:
a. Outstanding checks d. Unrecorded deposits g. Bank service charges
b. Debit memos e. Interest on cash balance
c. NSF checks f. Credit memos
2. Which of the items in part 1 require an adjusting journal entry?
The revenue recognition concept and the matching concept both support the accrual basis of accounting.
To determine which of the following options supports the accrual basis of accounting, let's first understand what the accrual basis of accounting means and then analyze each concept.
The accrual basis of accounting recognizes revenues and expenses when they are earned or incurred, regardless of when the cash flows actually happen. This means that transactions are recorded at the time they occur, not necessarily when the money is received or paid.
Now, let's analyze each concept:
1. Revenue recognition concept: This concept states that revenue should be recognized when it is earned, regardless of when the cash is received. This aligns with the accrual basis of accounting, as it recognizes revenue without considering the timing of cash inflows.
2. Cash concept: The cash concept, also known as the cash basis of accounting, recognizes revenues and expenses only when cash is received or paid. This does not align with the accrual basis of accounting, as it focuses solely on cash movements rather than when revenues are earned or expenses incurred.
3. Matching concept: The matching concept states that expenses should be matched with the revenues they generate. In other words, expenses should be recorded in the same period as the associated revenues, regardless of when the cash is paid. This aligns with the accrual basis of accounting because it recognizes expenses based on their relation to revenue generation rather than cash payments.
Based on the analysis, both the revenue recognition concept and the matching concept support the accrual basis of accounting. Therefore, the correct answer is: revenue recognition and matching concepts.