Bob during his operations as a farmer will need feedback on how the business is doing without waiting for the end of the accounting period. Therefore he should divide the economic life of the business into periods and determine the relevance of each business transaction to a specific accounting period. The period can be a month, a quarter, and a year. Bob should not that at the end he would consider either fiscal year(June – June ie Gov) which is different from the calendar year (Jan – Dec)
Bobs basis in accrual accounting is if he sold vegetables in a certain period he would record the transaction in that period even of he wasn’t paid . The alternative is cash-based accounting, which is to record only when he receives the cash. However, the disadvantage in cash based is it can mislead to an external person that the business is not doing well as the expenses don’t match the revenues. Based on the size of the farm business he should chose cash-based if it is small else accrual-based.
Bob under accrual would record the vegetable revenue in the receivable on the balance sheet and when he receives the cash as revenue in the income statement. thereafter let the expenses follow the revenues and should match them in the same period. This can all be considered under the adjusted entries and each entry will include one income statement and one balance sheet. The adjusted entries are classified as either deferrals or accruals.
