Accounting has been described as the language of business. Because managers of all organizations use accounting information, perhaps on a daily basis, it is critical that they understand the language. One of the obstacles to the best use of accounting information is that its terminology is confusing, especially when some of the terms used in accounting have alternate meanings in other business settings.
One of the purposes of this essay is to provide logical definitions for key business terms from an accounting perspective; thus avoiding misunderstandings from applying an inappropriate definition. A second purpose is to describe the contents of the typical income statement prepared for a profit-seeking corporation.
Accrual Accounting Vs.cash Basis Accounting
An area of confusion for many people is the concept known as accrual accounting. When individuals and small companies spend money, the expenditure is generally considered to be an expense. This is what accountants refer as the cash basis of accounting. But larger companies, particularly publicly heldcorporations, are required to use the accrual basis of accounting. From the accrual accounting perspective, the purpose of the expenditure determines whether or not the expenditure is an expense at the time of payment.
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