Reflection Question on Chapter 4:

The accrual basis of accounting calls for expenses to be recorded in the period when they are incurred rather than when the cash is paid. The “Matching Principle” indicates that expenses be recorded in the period in which the related revenue is earned.  This is why a hair salon owner records a debit to Pre-paid Rent (asset account) for $12,000 and a credit to Cash (another asset) when her landlord asks her to pre-pay an entire year’s worth of rent at the beginning of the year.  You learned in this chapter that the salon owner would then make an adjusting entry each month during the year to record a $1,000 credit to reduce Pre-paid Rent and a debit to Rent Expense.  Describe what you think the impact or consequences might be on the Salon’s monthly financial statements if the salon owner instead decided to record the entire $12,000 as Rent Expense in January in order to avoid having to make monthly adjusting entries. Would this pose any problems for the banker (at the bank where the salon borrows money) who reviews the salon’s quarterly financial statements?