Let’s start the week by exploring accrual-basis accounting. Why do accountants use the accrual-basis method instead of the cash basis method of accounting? What are some of the benefits of using accrual accounting?

GAAP requires that accrual accounting be used. This basis for accounting involves some basic accounting principles—the revenue recognition principle and the matching principle. Explain why these principles require adjusting entries.

A deferral involves putting off the recognition of a revenue or expense because the cash has changed hands before the appropriate recognition point. An accrual involves recording a revenue or expense because the recognition point is during the period, but the cash has not yet been received or paid. Provide an example of each and then the appropriate adjusting entry.

Apply accrual accounting by responding to some of these questions:

(1) On November 15, the company received $5,000 cash from a customer for services that were performed on November 1. According to the Revenue Recognition Principle, on which date should the revenue be recorded?

(2) On November 15, the Company received $3,000 cash from a customer for services that will be performed on December 1. According to the Revenue Recognition Principle, on which date should the revenue be recorded?

(3) On March 4, T Law asks GL Services for basic lawn maintenance totaling $200. GL provides maintenance on March 8, and T Law pays for the lawn maintenance on April 12. Under accrual-basis accounting, on which date should T Law record lawn maintenance expense?

(4) The company performs $2,900 of services during the month and bills customers. The customers are expected to pay next month. Record the journal entry for customer billing using (a) accrual-basis accounting and (b) cash-basis accounting.

(5) Suppose a company rents office space for one year, paying $18,000 ($1,500/month) in advance on September 1. Record the adjusting entry on December 31

(6) A gym offers one-year memberships for $99 and requires customers to pay the full amount of cash at the beginning of the membership period. For the gym, this is an example of a(n):