BASIC ACCRUAL ACCOUNTING CONCEPTS
INCLUDING THE MATCHING CONCEPTIn Chapter 2, we illustrated the recording of transactions for Family Health Care for
the months of September and October. In these illustrations, we used many of the ac-
counting concepts described in Chapter 1. For example, under the business entity con-
cept, we accounted for Family Health Care as a separate entity, independent of the
owner-manager, Dr. Lee Landry. Under the cost concept, we recorded the purchase of
land at the amount paid for it. Consistent with the going concern concept, we did not
revalue the land for increases or decreases in its market value, but retained the land in
the accounting records at its original cost. We also employed the accounting period,
full disclosure, objectivity, and unit of measurement concepts in preparing financial
statements for Family Health Care.
The one accounting concept that we did not emphasize in Chapter 2 was the
matching concept. This is because all the transactions in Chapter 2 were structured so
that cash was either received or paid. We did this to simplify the recording of trans-
actions and the preparation of financial statements. For example, all revenues were re-
ceived in cash at the time the services were rendered and all expenses were paid in
cash at the time they were incurred.
In the real world, cash may be received or paid at a different time from when rev-
enues are earned or expenses are incurred. In fact, companies often earn revenues be-
fore or after cash is received and incur expense before or after cash is paid. For example,
a company might spend months or years developing land for a business complex or
subdivision. During the development of the land, the company has to pay for materi-
als, wages, insurance, and other construction items. At the same time, cash might not
be received until portions of the development are sold. Thus, if revenues were recorded
only when cash is received and expenses recorded only when cash is paid, the com-
pany would report a series of losses on its income statement during the development
of the land. In this case, the income statements would not provide a realistic picture of
the company’s operations. In fact, the development might be highly successful and the
early losses misleading.
Accrual accounting concepts are designed to reflect a company’s financial perfor-
mance during a period and avoid misleading results that could arise from the timing
of cash receipts and payments such as those described in the preceding paragraph. At
the same time, accrual accounting recognizes the importance of reporting cash flows
through its emphasis on preparing and reporting the statement of cash flows.
Under the accrual concepts of accounting, transactions are recorded as they occur
and thus affect the accounting equation (assets, liabilities, and stockholders’ equity).
Since the receipt or payment of cash affects assets (cash), all cash receipts and payments
are recorded in the accounts under accrual concepts. However, under the accrual con-
cepts, transactions are also recorded even though cash is not received or paid until a
later point. For example, Family Health Care may provide services to patients who are
covered by health insurance. It then files a claim with the insurance company for the
payment. In this case, revenue is recognized when the services are provided, and the
services are said to be provided “on account.” Likewise, a business may purchase sup-
plies from a vendor, with terms that allow the business to pay for the purchase within
a time period, such as 10 days. In this case, the supplies are said to be purchased “on
account.” Each of the preceding illustrations represents a business transaction that af-
fects elements of the accounting equation and is therefore recorded under accrual con-
cepts,even though cash is not received or paidat the time of the transaction.
In accounting, we often use the term “recognized” to refer to when a transaction
is recorded. Under accrual concepts of accounting, revenue is recognized when it is earned.98 Chapter 3 Accrual Accounting Concepts
Describe basic accrual
accounting concepts,
including the matching
concept.1
Q.J. C. Clark, attorney at
law, drafted a will and
estate documents for Max
Winder on April 30. Clark
billed Winder $1,200 for
these services on May 20
and received payment on
June 4. In what month
should Clark record the
revenue under the accrual
concepts of accounting?A.April