Answer to Question #102837 in Accounting for Chandra

Question

December 31 Roberts Company has earned interest revenue of $3,500 on outstanding notes, even though the company will not actually receive the interest until the following year?

Answer 1

To clarify the situation, we should turn to the generally accepted accounting principles of the US GAAP; it is the US GAAP that partly allows us to understand the problem under study. This is due to the fact that in the US GAAP these issues are considered in more detail and in detail than in IFRS, since IFRS are supranational standards and do not go down to the level of individual accounts, which have their own characteristics in national accounting models.The problem of reflecting prepaid expenses in accounting and reporting in the US GAAP is very clearly stated and linked to the principle of matching (matching rule) between income and expenses, therefore, expenses should be attributed to the reporting period of the costs associated with generating income rather than paying money. Revenues, in turn, should relate to the period of sale of the goods, and not the receipt of money. Compliance with this principle is especially important when an organization keeps track of accruals of income and expenses. The essence of this method is that income and expenses are recognized earlier than cash is received against previously received income and payments are made on previously accrued expenses. Along with the accrual principle, the US GAAP also considers the deferral principle, according to which deferred expenses or income or prepaid expenses and income are generated. In contrast to the accrual method, in accordance with the deferral method, accounting earlier reflects receipt of cash against future income (advances received) and payment of cash for goods, work or services that should be received in future periods (deferred expenses, advances paid). Based on GAAP accounting rules, if Roberts maintains accrual accounting, we reflect interest on December 31. If accounting is done on a deferred basis, then interest is reflected in accounting before receiving cash against future income (advances received) and paying cash for goods, work or services that should be received in future periods (deferred expenses, advances paid).