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Revenue Recognition Principle By matching revenues with expenses the accrual concept became the cornerstone of accounting.
Modified accrual accounting is an alternative bookkeeping method that combines accrual basis accounting with cash basis accounting.
It recognizes revenues when they become available and measurable and, with a few exceptions, records expenditures when liabilities are incurred.
The modified accrual practice follows the cash method of accounting when economic events affecting the short-term have occurred.
An economic event is recorded in the short-term when the cash balance has been affected.
Modified accrual accounting is commonly used by government agencies.
Modified accrual accounting borrows elements from both cash and accrual accounting, depending on whether assets are long-term, such as fixed assets and long-term debt, or short-term, such as accounts receivable (AR) and inventory.
In accrual basis accounting an attempt is made to record the effects of transactions in the period in which they occur, rather than in the period in which cash is paid or received by a business.
To properly determine net income under accrual basis accounting, revenues and expenses must be assigned to the appropriate accounting period.
There are multiple ways to recognize revenue within Generally Accepted Accounting Principles (GAAP).
Even though economic reality is the same, the financial statements may look drastically different depending on which method is chosen.