Explain Both the Accrual Basis and the Cash Basis of Accounting

question 4

Essay

Explain both the accrual basis and the cash basis of accounting and indicate why most companies use the accrual basis.

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Definitions:

Wages Payable

The total amount of wages that a company owes to its employees for work performed but has not yet paid.

Prepaid Advertising

Represents the costs paid in advance for advertising services, which will be expensed over time as the advertising benefits are received.

Income Statement

A financial statement that reports a company’s financial performance over a specific accounting period, detailing revenues, expenses, and profits.

Current Year

The ongoing year or period that is currently being accounted for or considered, often in contrast to previous or future years.