On May 1, the City of Dustin was notified of approval of a $300,000 federal operating grant, payable on a reimbursement basis as the city expends resources for the intended purpose of the grant. As of May 1, no expenditures had been made for grant purposes. The journal entry to record approval of this grant will include:

A) A credit to Revenues in the amount of $300,000.

B) A credit to Deferred Resources - Grant Proceeds in the amount of $300,000.

C) A debit to Grants Receivable in the amount of $300.000.

D) No journal entry will be made until expenditures for the authorized purpose occur.

The correct answer is D) No journal entry will be made until expenditures for the authorized purpose occur.

Explanation:

Remember that in accounting the rights and obligations are recognized, so that if the company has acquired a right to claim something in a future time, it must be recognized in the accounting, and also if it has acquired an obligation that a third party can demand In the future, you must recognize it.

The accounting by causation, contrary to the accounting by the cash system, recognizes a fact at the time the obligation arises in front of a third party, or when the enforceable right in favor of the entity is born.

This principle is intimately related to the principle of realization, insofar as it is affirmed that only facts must be caused, and we know that a fact has been realized when the obligation or the law is born, so the principle of causation cannot exist without First there was the principle of realization.

The application of the principle of causation means that the economic facts must be recognized and accounted for in the accounting period in which they occur, that is, in the period in which the good is sold, the service is provided or in which the obligation is legally established or the right.