Accrual Accounting

In: Business and Management

Submitted By aleahdean
Words 11383
Pages 46
Chapter 3

Accrual Accounting & Income

Short Exercises

(10 min.) S 3-1

Millions
Sales revenue……………………………………………. 960
Cost of goods sold……………………………………… (270)
All other expenses……………………………………… (300)
Net income……………………………………………….. $ 390

Beginning cash………………………………………….. $ 105
Collections ($700 − $30)……………………………….. 935
Payments for: inventory………………………………. (370) everything else………………………. (285)
Ending cash……………………………………………… $ 385

(10 min.) S 3-2

Statement Reports (Amounts in millions)
Income statement Interest expense………………. $1.8 Balance sheet Notes payable ($3.9 + $2.3 − $2.0)…………. $4.2 Interest payable……………….. 0.1

(10 min.) S 3-3

At the end of each accounting period, the business reports its performance through the preparation of financial statements. In order to be useful to the various users of financial statements they must be up-to-date. Accounts such as cash, Equipment, Accounts Payable, Common Stock and Dividends are up-to date and require no adjustment at the end of the accounting period. Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be up to date as of the last day of the accounting period. Why? Because certain transactions that took place in the month may not have been recorded.

The accrued salaries, which are owed to the employees yet have not been paid, are an expense related to the current period. The salaries that are owed to the employees but are unpaid also represent a liability or debt that is owed by the business. The business must make an adjusting entry to record the accrued salary owed as both an increase in Salary Expense and an increase in Salaries Payable. If the business does not make this adjustment the expenses will be understated and net income will be overstated. In…...

Similar Documents

Accrual Accounting

...Accrual Accounting Two methods used to help human service organizations keep financial records according to Martin (2001), are referred to as “cash accounting and accrual accounting” (pg. 8, Cash and Accrual Accounting). However the accrual method is highly preferred and for many organizations this method is required. This paper will discuss their differences, why accrual accounting is important, and the importance of a cash flow statement with regard to financial management of an organization. Although cash accounting and accrual accounting are methods used to keep financial records, each method focuses on a different recording and reporting time frame pertaining to revenues and expenses. With cash accounting there are no records of receivables, payables, and this method lacks the ability to track partial payments. This is because revenues are recorded as of the date they are received despite when they are earned, and expenses are recorded as of the date they are paid despite when they are incurred (Snyder, n.d.). With accrual accounting revenues are recorded when earned despite when they are received, and expenses are recorded as they are incurred rather than when they are paid (Snyder, n.d.). The accrual method is important because it better reflects the organizations outcomes regarding their operations. Unlike cash accounting, accrual accounting includes receivables and payables, and revenues and expenses are recorded in full despite the fact that partial payments......

Words: 533 - Pages: 3

Accounting: Accrual vs Cash

...Accounting: Accrual versus Cash Zachary Ingwaldson ACC 290 October 14, 2012 Tamyra Ford Accrual vs. Cash Accounting departments are responsible for the documentation and upkeep of transactions that pertain to business needs, development, and sustainability. Businesses such as non-profit, small, and large corporations may use different platforms to perform the transaction accountability necessary. Most notably, many profitable businesses use either the accrual bases or cash bases with a preference for the accrual. The following will describe the two recording statements mentioned and the differences between them. Examples of company preference regarding the accrual method will also be examined. Cash Basis Accounting The cash basis of accounting is generally used for companies that document transactions when cash is received for a good or service already performed. Likewise, a transaction is not documented as a liability or credit until the bill or payable expense is complete. However, according to the book Financial Accounting: Tools for Decision Making, the cash basis of accounting is generally “prohibited under generally accepted accounting principles because it does not record revenue when earned” (Kimmel, Weygandt, & Kieso, 2009, p. 164). This practice does not reflect expenses incurred which is also a violation of the matching principle. An example of cash basis accounting is completing a...

Words: 544 - Pages: 3

Accrual Basis of Accounting Versus Cash Basis

...Accrual Basis of Accounting versus Cash Basis of Accounting Danielle Spraker ACC/290 February 12th, 2013 Michael Olsen Accrual Basis of Accounting versus Cash Basis of Accounting Financial scandals that have severely damaged public faith in information provided by organizations have lead to more stringent regulations. A standardized basis of accounting allows for regulators to ensure information is presented ethically and legally. Accrual based accounting is required for all corporations that trade publicly as this basis is generally considered to provide a more accurate image of the financial standing of a company than that of cash based accounting. Accrual based accounting requires that an organization report expenses and revenues in the time period in which they occur rather than when cash physically changes hands. The text, Financial Accounting: Tools for business decision making, describes accrual accounting as, “Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged. For example, using the accrual basis means that companies recognize revenues when earned (the revenue recognition principle), even if cash was not received. Likewise, under the accrual basis, companies recognize expenses when incurred (the matching principle), even if cash was not paid.” (Kimmel, 2010). For example, if a rental company bills a hotel for chairs used in......

Words: 498 - Pages: 2

A Brief Description and Comparison of Accrual Versus Cash Basis Accounting

...bases of accounting When discussing the two different bases of accounting, accrual basis accounting and cash basis accounting, it is important to remember that the accrual basis of accounting agrees with both the matching principle and the revenue recognition principle, and that the cash basis of accounting violates both of these principles. Thus, of the two bases, only the accrual basis of accounting complies with generally accepted accounting principles. The basis of accounting utilized by a company depends on the nature of the company. Both of these bases of accounting serve distinct purposes for different reasons, depending on the accounting needs of a given company. Accrual basis accounting Accrual basis accounting requires that you record events in the time period in which they occur, regardless if there is money exchanged or not. Accrual basis accounting makes you follow the revenue recognition principle and the matching principle. Revenue recognition principle states that revenue is recorded in the time period which it occurred, not when money is received. Matching principle, also known as the expense recognition principle, states that expenses are recorded when they are accrued not when you pay for them. Accrual accounting takes in to account deferrals and accruals. Examples of deferrals are prepaid expenses such as prepaid insurance premiums and unearned revenues such as prepaid deposits for work to be complete at a later date. Examples of accruals are......

Words: 414 - Pages: 2

Accrual Basis of Accounting over the Cash Basis

...The two main methods of recording accounting transactions are cash basis accounting and accrual basis accounting. Each method has both advantages and disadvantages. However, only one method is approved by GAAP. Cash basis accounting is the method in which cash receipts and cash payments are recorded during the period in which they occur (Spiceland et. al., p. 7). Under the cash basis accounting method, the revenue is recognized when the cash is received and the expense is recognized when the cash is disbursed. In addition, there is no inventory account under the cash basis method. Goods and materials purchased for sale are recorded as direct costs in the period that payment is made for those goods and materials (Berry). Cash basis accounting is a simple and inexpensive method to implement and utilize. It also provides an accurate representation of cash flow. Additionally, the cash basis method provides the opportunity to "defer taxable income by delaying billing so that payment is not received in the current year.Cash basis accounting does not comply with two important accounting principles: the revenue recognition principle and the matching principle. Since the cash basis technique does not recognize receivables or payables, it is not an accurate method of measuring profit (Nelson). Accrual basis accounting is the method in which revenue is recognized when earned, and expenses are recognized when incurred. Additional accounts must be created to record the difference......

Words: 575 - Pages: 3

Accrual and Cash Accounting

...Accrual and Cash Accounting ACC 290 The biggest difference between accrual and cash basis accounting is the timing in which the revenues or expenses are recognized. Cash basis accounting is used mostly by small businesses or personal finances. The cash basis method accounts for revenue only when money is received or expenses only when money is paid out. For example, when you balance your checkbook, you only enter your paycheck when it is deposited into the bank, and when you write a check to pay a bill, you subtract that sum from your account. The accrual accounting method accounts for revenue when it is earned and for expenses, goods and services when they are performed. Revenue is recognized even if no cash has been received or, in the case of an expense, that has been incurred, no cash has been paid out, and it is the most common method used by businesses today. Let’s say you sell $10,000 worth of goods, under the cash basis method the amount id not entered in to the books until the money has been collected or a check is received. With the accrual accounting method, the $10,000 is recorded as revenue as soon as the sale is made. This is the same for expenses. If you get an electric bill for $1,500, using the cach basis method, it is not entered in to the books until the bill is paid. Under the accrual accounting method, it is entered as an expense as soon as it is received. (Morah, C. 2009) Accountants use the Generally Accepted Accounting Principles (GAAP) to......

Words: 426 - Pages: 2

Accrual and Cash Accounting

...Accrual and Cash Accounting Accrual and Cash Accounting Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011) “Accrual-basis accounting (p. 166) Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company’s financial statements, even if cash was not exchanged.” Accrual accounting is an accounting process that could be properly utilized by a large company. One example is a company that is turning over millions of dollars in revenue yearly. A large company that is generating that much money and turning it around yearly has to maintain large volumes of cash flow. Without the large volume of cash flow, the company would be unable to maintain high volumes. Because of the high cash flow, money is constantly coming in and going back out. One example in today’s market is Wal-Mart/Sam’s Club stores. A company this size can afford to use the accrual method because it does not have to maintain a close watch on how much actual money is in the bank at any given time. The retail company has cash flow to order inventory, make payroll, and pay other bills at any given time. The accrual-basis is a better accounting process because it accurately creates a picture of the actual profits during a given time. It can make for clear tax predictions as well as accurate projections. Averkamp, H. (2014) “The accrual basis of accounting provides a better picture of a company's profits during an accounting......

Words: 592 - Pages: 3

Accrual and Cash Basis Accounting

...Accrual and Cash Basis Accounting XACC/290 February 8, 2015 Accrual and Cash Basis Accounting Accrual accounting is when a company accounts for their transactions as the event occurs, not necessarily when the actual cash transaction takes place. When the revenue is earned can be a different time than when the revenue is paid for; for example, when Company A is called in to fix an intercom for a tenant of one of Company B’s buildings. The revenue is earned on January 30 and will be on January’s transactions; however, Company B does not pay Company A until they are billed in February, when the revenue is recognized (Kimmel, Weygandt, & Kieso, 2009). On the other hand, cash accounting takes into account when the actual cash transaction takes place, when cash is exchanged for a transaction, the revenue is then recorded as earned. It is acceptable for an accountant to use cash basis accounting and not violate the generally accepted accounting (GAAP) for companies that are in the service industry. A nanny that works for a family may work from January 26th to February 9th and bills the family for that two week time period on February 9th. The family would pay in February and the revenue would be recognized as being earned in February (Kimmel, Weygandt, & Kieso, 2009). All in all, accrual accounting requires more work, but is generally accepted account principles and the more accurate of the two different accounting practices. Reference Kimmel, P. D.,......

Words: 268 - Pages: 2

Cash vs Accrual Accounting

...Difference between Cash and Accrual Accounting: The cash basis of accounting, simply as the name suggests, records financial information on the basis of the actual cash movement. Revenues to be recognized when cash received and expenses to be recognized when cash paid out. Cash basis is normally adapted by small businesses mainly traders as it is quite easy, straightforward and can easily be set up and maintained without following a lot of complex accounting rules. Care must be taken when using financial statements prepared under the cash basis as it is not completely accurate e.g cash outflows due to purchases of fixed assets would only affect the period they are recorded in though they are to be used over a certain period of time, concepts such as depreciation are used under the accrual system to overcome such disruptions. The accruals basis of accounting which is a more sophisticated method recognizes revenues when “earned” and expenses recorded when “incurred” regardless of the cash movements relating to each. For e.g. in the case of a service business providing a service will recognize its revenue once the job is completed even if the customer hasn’t cleared the dues yet. Same approach is used for the expenses, recorded when incurred not when paid. Accrual accounting method improves the reported information by presenting a more realistic and accurate view of the underlying operations primarily matching reported income with reported expenses in a specific period. When......

Words: 343 - Pages: 2

The Differences Between Cash Basis and Accrual Basis Accounting

...goal is to make profit and earn money. However, using different accounting systems to record transactions may meet different results in the end of a period. There is a statement that the accounting profit is equal to the incomes earned in the period minus the expenses happened in the period. There are two accounting systems to record the transaction of a company, which are cash basis accounting and accrual basis accounting. In this essay, I will talk about the differences between the two accounting systems. Then the advantages and disadvantages of cash basis and accrual basis accounting will be discussed. The statement in the third sentence about how to calculate profit uses accrual basis accounting method instead of cash basis accounting. Rich et al. (2009, p.115) says “ under cash basis accounting, revenue is recorded when cash is received, regardless of when it is actually earned. Similarly, an expense is recorded when cash is paid, regardless of when it is actually incurred.” It means that cach basis accounting only records transactions when the cash has been received or paid out. Accrual basis accounting (also called accrual accouting) is another system of transaction recording for a organization. It is an alternative system to cash basis accounting. “ under accual accounting, a company records recenues in the accounting period in which they are earned and realized, and records expenses in the accounting period they are incured.” (Nikolai, Bazley & Jones, 2009, p.105)...

Words: 1183 - Pages: 5

Accrual Accounting

...Accrual Basis Accounting: Businesses Record Transactions as They Occur Abstract The purpose of this paper is to summarize the effects of accuracy and reliability of accrued expenses for financial information provided to users based on academic information. I will evaluate several key factors that are involved in accruing for expenses and how accruals affect a company’s financial statements. Included will be GAAP’s matching principle and FASB guidance on accruals. Other sources examined will from several academic articles. The results indicate that accruing for expenses maintain the matching concept. Accruals help avoid deceptive income statements that could result from the timing of cash payments. Table of Contents Abstract …………………………………………………………………………………...2 Table of Contents …………………………………………………………………………3 Introduction …………………………………………………………………………….....4 Literature Review ………………………………………………………………….. …......5 Locating Financial Misstatements: Where to Look……………………………....5 Accounting for the Costs to treat Environmental Contamination…………………7 Coping with FASB Statement No. 106-- "Accounting for Post-retirement Benefits Other Than Pensions…………………………………………………8 On the Implementation of Accrual Accounting: A Study of Conflict and Ambiguity……………………………………………………………………..8 Depreciation Rules and the Relation between Marginal and Historical Cost…….9 The Role of Accruals in Asymmetrically Timely Gain and Loss Recognition…...9 On......

Words: 2775 - Pages: 12

Acc 225 Week 3 Checkpoint Adjustments and Accrual and Cash Basis Accounting

...ACC 225 WEEK 3 CHECKPOINT ADJUSTMENTS AND ACCRUAL AND CASH BASIS ACCOUNTING To purchase this visit here: http://www.nerdypupil.com/product/acc-225-week-3-checkpoint-adjustments-and-accrual-and-cash-basis-accounting/ Contact us at: nerdypupil@gmail.com ACC 225 WEEK 3 CHECKPOINT ADJUSTMENTS AND ACCRUAL AND CASH BASIS ACCOUNTING CheckPoint: Adjustments and Accrual and Cash Basis Accounting • Resource: Fundamental Accounting Principles, pp. 116118 and 120 • Due Date: Day 5 [Individual] forum • Complete Quick Study questions QS 31 and QS 39 on pp. 116 and 117 and Exercises 31 and 37 on pp. 118 and 120. • Post your answers as an attachment. Home Work Hour aims to provide quality study notes and tutorials to the students of ACC 225 Week 3 Checkpoint Adjustments and Accrual and Cash Basis Accounting in order to ace their studies. ACC 225 WEEK 3 CHECKPOINT ADJUSTMENTS AND ACCRUAL AND CASH BASIS ACCOUNTING ACC 225 WEEK 3 CHECKPOINT ADJUSTMENTS AND ACCRUAL AND CASH BASIS ACCOUNTING To purchase this visit here: http://www.nerdypupil.com/product/acc-225-week-3-checkpoint-adjustments-and-accrual-and-cash-basis-accounting/ Contact us at: nerdypupil@gmail.com ACC 225 WEEK 3 CHECKPOINT ADJUSTMENTS AND ACCRUAL AND CASH BASIS ACCOUNTING CheckPoint: Adjustments and Accrual and Cash Basis Accounting • Resource: Fundamental Accounting Principles, pp. 116118 and 120 • Due Date: Day 5 [Individual] forum • Complete Quick Study questions QS 31 and QS 39 on pp. 116 and......

Words: 745 - Pages: 3

Besluitvorming in de Publieke Sector. Accrual Accounting Superieur of Toch Niet?

...Besluitvorming in de publieke sector. Accrual accounting superieur of toch niet? 1 Inleiding In de afgelopen twee decennia, vindt er in de wereldwijde publieke sector een overgang plaats van het boekhouden op basis van cash accounting naar het boekhouden met accrual accounting (Carlin, 2003). Volgens Riahi-Belkaoui (2004) wordt accrual accounting, in de private sector al vele jaren gebruikt. Reden hiervan is dat accrual accounting, de verwachte toekomstige winsten en kasstromen goed kan voorspellen (Riahi-Belkaoui,2004). Hyndman en Connolly (2011) beweren dat de overstap van cash- naar accrual accounting, door veel overheden als een stap naar een meer zakelijke en prestatiegerichte publieke sector wordt gezien. Dit wordt het New Public Management genoemd. Voorstanders van accrual accounting beweren dat hiermee, het doel van het New Public Management wordt bereikt (Hyndman, & Connolly, 2011). Chase en Trigs (2001) vinden dat accrual accounting ook zal helpen, om overheidsfinanciën inzichtelijk en verklaarbaar te maken. Cash accounting geeft weinig inzicht in de financiële situatie van organisaties en is hierdoor niet betrouwbaar of transparant genoeg voor besluitvormingen (Caperchione, 2006). In tegenstelling tot de voorstanders, stellen Arnaboldi en Laplsey (2007), Elwood (2003), Broadbent en Guthrie (2008), dat de context waarin lokale overheden opereren, de aard van de activa en de historische boekhouding, belemmerend werken voor accrual accounting. Hiermee wordt......

Words: 3683 - Pages: 15

Accounting for Cash Flow Throughtout the Business Utilizing Accrual Accounting Practices

...“Accounting for Cash Flow throughout the Business Utilizing Accrual Accounting Practices” Group 4 Kesha Smith Dave Rebar Amber Sabrina Tanisorn Ruengpinyophun February 17, 2012 Table of Content I. The Statement of Cash Flow II. The Statement of Cash Flow The statement of cash flow (SCF) is one major part of basic financial statements. The purpose of the SCF is to provide information about the cash receipts and cash disbursements of an enterprise that occurred during a period (Spiceland, Sepe & Tomassini, 2004, p. 198). The SCF reflects the liquidity and solvency position of a company. It provides inside information on the company’s ability to generate cash from its main operations, and it’s an indicator to help give information on future expansion. It also helps gauge the company’s ability to handle cash effectively. An analysis of the SCF will provide the company information on the funds available to help repay debts and repayment of assets (Lamas & Gregorio, 2009, p. 99). There are three primary elements of the SCF, (1) operating activities, (2) investing activities, and (3) financing activities; there are two other requirements: (4) the reconciliation of the net increase or decrease in cash with change in the balance of the cash account and (5) noncash investing and financing activities (Spiceland, Sepe, & Tomassini, 2004, p1188). Let’s get a better insight of the flow of each activity. Operational activities are the......

Words: 931 - Pages: 4

Adjustments and Accrual and Cash Basis Accounting

...accrued expenses (AE), or accrued revenues (AR). a. UR To record revenue earned that was previously received as cash in advance. b. PE To record annual depreciation expense. c. AE To record wages expense incurred but not yet paid (nor recorded). d. AR To record revenue earned but not yet billed (nor recorded). e. PE To record expiration of prepaid insurance. 3-9 In its first year of operations, Harden Co. earned $39,000 in revenues and received $33,000 cash from these customers. The company incurred expenses of $22,500 but had not paid $2,250 of them at yearend. Harden also prepaid $3,750 cash for expenses that would be incurred the next year. Calculate the first year’s net income under both the cash basis and the accrual basis of accounting. Accrual Method Revenues 39,000 Expenses 22,500 Prepaid 0 Net Income = 16,500 Cash Method Revenues 33,000 Expenses 20,250 Prepaid (Expense) 3,750 Net Income = 9,000 3-1 In the blank space beside each adjusting entry, enter the letter of the explanation A through F that most closely describes the entry: A. To record this period’s depreciation expense. B. To record accrued salaries expense. C. To record this period’s use of a prepaid expense. D. To record accrued interest revenue. E. To record accrued interest expense. F. To record the earning of previously unearned income. ___B___ 1. Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,280 Salaries Payable . . . . . . . . . . .......

Words: 388 - Pages: 2

Animation | Forza Motorsport 4 Unicorn Cars Edition | ネイルアートアクセサリー