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When financial statements are prepared, in order to comply with Generally Accepted Accounting Principles (GAAP), they must be prepared using the accrual basis of accounting. This differs from the cash basis because rather than record transactions only when money is received or paid, revenues are recognized when earned, and expenses are recorded when incurred. What does the word accrue mean? What types of events or activities in your own daily life represent accrued expenses?
The matching principle requires that businesses match the expenses incurred with the earned revenue. Depreciation is another example of this accounting principle.
Class, what is depreciation and why do we have to make an adjustment for depreciation each accounting period? What are some examples of assets that a business might depreciate?