Question 2

The Malaysian government, like most government, has decided to change from cash basis accounting and to accrual accounting basis. The government has decided to expense the amount in the year it was originally allocated rather than in the period the payments would be made.

Required:

a) Explain the concepts of cash basis accounting and accrual basis accounting.

b) Provide justifications on the adoption of accrual basis accounting in place of cash basis accounting.

c) On May 1 2020, Desa Petaling Cleaning Services paid $1,200 for a one-year fire insurance policy beginning May 1. The payment was recorded as Debit in Prepaid Insurance. On May 31 the account shows a balance of $1,200. Each month insurance expires $100 (i.e., $1,200 12 months). Based on this information, answer the following questions:

i. Make the necessary journal entries for the above transaction in complying with the concept of revenues and expenses recognition.

ii. How does accrual basis of accounting relate to assumption accounting of time period in the context of recognizing revenues and expenses?