What is Cash Basis and Accrual Basis Accounting?
The difference is when the expense is recorded in the books. With cash basis accounting, the expense is recognized when the cash is paid out. With accrual basis accounting, the expense is recognized when the liability is incurred. A simple example: I purchase a stapler on December 31, 2007 and pay for it on January 1, 2008. With cash basis accounting, the stapler is recognized as an expense in 2008. With accrual basis accounting, the staple is recognized as an expense in 2007 - when it was actually purchased. That's the general idea, but it's not 100% accurate. In accrual basis accounting, the expense is supposed to be recognized as the asset is used in the course of the business. As such, it becomes the theoretical justification for depreciation. Without the accrual basis, there would be no reason for depreciation. Example - I purchase a building for $1,000,000 in 2007 and use it in the course of my business over the next 20 years. At that time, I sell it for $200,000. Under cash basis accounting, I would recognize an expense of $1,000,000 in 2007 and a revenue (or contra-expense, if you prefer) 20 years later. Under accrual basis accounting, I might recognize an expense of $40,000 a year for 20 years. So why didn't I depreciate the stapler in the example above? In the strictest theory, I should have. However, there is another accounting principle at play here - materiality. Since the depreciation of the stapler over the next few years would not have made a material difference on the financial statements, it is okay to expense it immediately.
About accrual-basis accounting exercise?
What is your question? What don't you understand? Where is your solution? Do you just want someone to do your work for you? You would learn nothing that way and it would be a disservice to you. And if you turned in the answer prepared by another person as your own work you would be committing plagiarism which is unethical. I get $2,300. How does that compare with your answer? Accrual accounting means that you record revenue in the period earned, regardless of the time the cash is collected, and you record expenses in the period incurred, regardless of the time the cash is paid. Revenuer is earned when you perform a service or sell a product. It is not appropriate of you to assign your homework to others. To get help you should do the work as well as you can and provide your solution so someone can help you by pointing out where you are wrong and by explaining areas where you show weaknesses.
Accrual accounting? What is it?
Generally, usual rule of accrual accounting in this case refers to....the matching principle. Matching principle: In accounting, the notion that expenses should be recorded in the same period in which the expenses were used to earn revenues. Say, for example, you buy 100 pencils for $100 with the intent to resell them for $102 and make a profit. You buy them on 12/26/10 but you don't sell them until 1/10/11. In '10 you have actually paid for them but this is NOT an expense against income yet b/c you don't have income from selling them yet. Instead, the pencils become an asset (inventory) on the balance sheet. In '11 when you sell them for $102 (income), you then expense the cost $100 as cost of good sold. Thus "matching" the expense with the revenue you earned ...that you could only have earned because of the expense. If you think of this in a larger context, the reasons become obvious. Example of NOT matching...(i.e. cash accounting, NOT accrual accounting) You buy $100million worth of airplanes(in 2010) which you intend to sell for $120 million (in 2011)... 2010 Sales: $0 Expense: $100m NI: ($100m) 2011 Sales: $110m Expense: $0 NI: $110m For accrual accounting your income statement would look like this. 2010 sales $0 expenses $0 NI $0 2011 sales: $110m expenses: $100m NI: $10m
Accrual Concept in Accounting means that Expenses and Revenues are recorded for a particular period irrespective of they are paid or received.In Accrual Accounting Expenses are recorded when they are incurred and Income when it is earned where as in Cash Accounting expenses are recorded when they are paid and income when it is received. This method provides more accurate information about the current condition of any entity.For Example : If an entity sell TV to someone on Credit, then as per cash accounting revenue is recognised when the Cash is received it is likely that payment may be received after a month or year. Whereas in Accrual Accounting revenue is recognised when the ownership is transferred that is at the point of sale.
Cash and accrual accounting questions?
Idol, Inc. paid salaries expense of $350,000 during 2010. However, additional salaries of $20,000 had been earned by employees, but not paid or recorded at December 31, 2010, by Idol. A) What adjusting entry is necessary at December 31, 2010? B) Under which basis, cash, accrual, or both, would the adjustment in part A be prepared? Explain. C) Under the accrual basis of accounting, what is the total amount of salaries expense for the year ended December 31, 2010? D) Under the accrual basis of accounting, what is the total amount of salaries payable to be reported at December 31, 2010? E) Under the cash basis of accounting, what is the total amount of salaries expense for the year ending December 31, 2010? F) Under the cash basis of accounting, what is the total amount of salaries payable at December 31, 2010?
Accrual accounting is based on the accounting principle of recording revenue and expenses in the periods in which they are incurred, rather than paid (i.e. Cash Basis of accounting).If you look at a Balance Sheet, it is very common to see the discrete line items called Accounts Receivable (and other similar accounts) and Accounts Payable (and other similar accounts starting with the word "accrued.").The easiest example is sales. I sell a product to you, ship it to your warehouse and you receive it. The title to the property has passed on to you. There is no question that it is yours. This happens in January. I send you an invoice with the terms, net 30 (you are now expected to pay me 30 days from the date I shipped it to you).The accounting entry, on an accrual basis, would be to recognize a Sale (which would appear on my January Profit and Loss Statement) typically called Revenue or Sales. The corresponding, or balancing, entry would be to simultaneously recognize that you owe me money for that sale. This should show up on my Balance Sheet as "Accounts Receivable."Expenses work in much the same way, however, in an opposite fashion. I have the lights turned on for the entire month of January. I know I will have to pay the electric bill, but it won't be paid until sometime in February. My January P&L would show a utiliities expense of $___, while the corresponding Balance Sheet would recognize that I owe the electric company $____ (i.e. Accounts Payable).Accrual accounting is what most companies (and all medium and larger companies) use, as the financial activity it reflects most closely represents what has happened, regardless if money was actually paid or received.
What is the main disadvantage of accrual accounting?Accrual accounting can be complex and difficult to manage. Without the knowledge or resources available to manage accrual accounting, confusion and mistakes are likely to occur. Users of accrual accounting have overspent because of not accurately accounting for revenues and expenses.Another disadvantage of accrual accounting relates to the first, in that the confusion of accrual accounting can lead others to deception of financial statements. Enron and other companies have misused accrual accounting to hide mistakes and weaknesses within their respective financial reports. While this type of accounting can be beneficial, it can also be used to hide fraud.The downside of this method is that you pay income taxes on revenue before you've actually received it.A significant failing of the accrual basis of accounting is that it can indicate the presence of profits, even though the associated cash inflows have not yet occurred. The result can be a supposedly profitable entity that is starved for cash, and which may therefore go bankrupt despite its reported level of profitability.
There are two methods of preparing and presenting the Statement of Cash Flows (SOCF):Direct method and Indirect method.Direct method considers the actual inflows and outflows of cash to reconcile the opening and closing cash position. This is the preferable method of presentation but due to the nature of recording transactions, it turns out to be a tedious task for anything bigger than a small company. Indirect method on the other hand takes the movements in various working capital balances and reconciles those to the profit before tax and other cash flow items to arrive at the movement in cash flows. Since the starting point in this method is the profit, which is accruals based and changes in working capital (which are also accrual based) this method appears to present SOCF using accrual based accounting. But if the statement is prepared using direct method, it would appear to be cash based.
Accrual Basis and Cash Basis?
The difference is when the expense is recorded in the books. With cash basis accounting, the expense is recognized when the cash is paid out. With accrual basis accounting, the expense is recognized when the liability is incurred. A simple example: I purchase a stapler on December 31, 2007 and pay for it on January 1, 2008. With cash basis accounting, the stapler is recognized as an expense in 2008. With accrual basis accounting, the staple is recognized as an expense in 2007 - when it was actually purchased. That's the general idea, but it's not 100% accurate. In accrual basis accounting, the expense is supposed to be recognized as the asset is used in the course of the business. As such, it becomes the theoretical justification for depreciation. Without the accrual basis, there would be no reason for depreciation. Example - I purchase a building for $1,000,000 in 2007 and use it in the course of my business over the next 20 years. At that time, I sell it for $200,000. Under cash basis accounting, I would recognize an expense of $1,000,000 in 2007 and a revenue (or contra-expense, if you prefer) 20 years later. Under accrual basis accounting, I might recognize an expense of $40,000 a year for 20 years. So why didn't I depreciate the stapler in the example above? In the strictest theory, I should have. However, there is another accounting principle at play here - materiality. Since the depreciation of the stapler over the next few years would not have made a material difference on the financial statements, it is okay to expense it immediately.
In accrual accounting, the “matching principle” states that expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash to suppliers/vendors for said expenses occurs.Revenue also follows the same principle. For example, when you buy something with a credit card ‘today’, a company using the accrual method of accounting will record that revenue today, even though the credit card company may not pay them until days later (which could fall into the next accounting period).