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Understanding Application of Accrual Accounting Method.docx
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trn:oid:::1:2861533998 1 Pages

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Mar 22, 2024, 3:49 PM UTC

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 Page 3 of 3 - AI Writing Submission Submission ID trn:oid:::1:2861533998

Understanding Application of Accrual Accounting Method

Were the revisions to the financial statements (inclusion of $48,500 in accounts receivable
and of $15,650 in accounts payable) correct or incorrect? Why or why not? Be sure to use
detailed reasons to support your response.

The revisions to the financial statements to include $48,500 in accounts receivable and $15,650 in
accounts payable were correct under the accrual basis of accounting. Under this method, revenues
and expenses are recorded when they are earned or incurred, regardless of when the cash is actually
received or paid. The inclusion of accounts receivable indicates that Meridian Co. has earned
revenue from its customers for goods or services provided, even though it has not yet received
payment. Similarly, recording accounts payable acknowledges that the company has incurred
expenses for goods or services that it has received, even though it has not yet paid for them. This
provides a more accurate representation of the company’s financial position and performance
because it matches revenues with the expenses related to generating those revenues within the
same period.

Was the inclusion of the $20,000 in accounts receivable correct or incorrect? Why or why
not? Be sure to use detailed reasons to support your response.

Including an additional $20,000 in accounts receivable for an order that will not be delivered until
January 5, 2024, is incorrect under accrual accounting principles because revenue should only be
recognized when it is earned – which is when the goods or services have been delivered or
provided, not when an order is made. Since the merchandise will be delivered in the next
accounting period (post-January 1, 2024), this revenue should not be included in the current
period's financial statements for 2023.

When will the company record the $20,000 revenue for merchandise ordered by the
customer? Explain.
The company will record the $20,000 revenue when the merchandise ordered by the customer is
delivered on January 5, 2024. In accordance with revenue recognition principles under accrual
accounting, revenue is recognized when control of goods has transferred to the buyer – which
usually occurs upon delivery – and it is probable that economic benefit will flow to the entity
(Meridian Co.), and this value can be reliably measured. This would fall into Meridian's 2024
financial statements as this is when the earnings process is completed and revenue can be
recognized.

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