Accounting Essay

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Summary Question One Week Three Sukhjodh S. Johal Accounting 290 February 4, 2014 Wendy Ulrich Summary Question One Week Three In accounting there are two methods of trying to financially keep track of money in an organization. One of the methods is primarily used for small business owners which is commercial accounting, and the other accounting term which is accepted throughout big U.S. organizations or corporations is the GAAP. In commercial accounting entries into the accounting journal are made when liquid cash has been received or when it has been paid out. The transactions being made are recorded only when physical cash has been exchanged in a transaction, weather money is going out of the company or coming in. This type of accounting method does not qualify the accounting terms to be accepted under the GAAP (Generally Accepted Accounting Principles). The reason being is because the accounting method does not have any set principles such as the “matching principle” and the “revenue recognition principle”. The revenue recognition principle suggest that companies should recognize revenue in which period they were earned (Wiley, 2009). The matching principle states that a company should match expenses with related revenue in order to report a company’s profitability during a specific period of time. The GAAP uses the accrual base accounting system, which is transactions that change a company’s financial statements are recorded in the period in which the event occurred (Wiley, 2009). Accrual basis of accounting accurately matches income to expenses keeping track of the financial cash flow regardless if a physical transaction has been made in a certain period of time. An example would be when revenue is received in the accrual basis of accounting but not yet been physically paid, it is recorded into the accounting journal as accounts receivable. When the

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