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Accruals

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Accruals
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  Class, here is an overview of accrual accounting. I hope this may help you understand. Please see me if you have any questions. ACCRUAL ACCOUNTING  –  Income and Expense are recorded when they are ‘ EARNED ’ (for Income) ‘ INCURRED ’ (for Expense) , not necessarily when cash is received or paid. Income is earned when: ã   Activities necessary to generate revenue substantially complete ã   Amount of revenue can be objectively determined ã   Reasonable certainty that amount will be received Expenses are incurred when:    The expense has been used up/incurred/consumed by the business. Accrual Accounting for Revenue Revenue Receivable: Revenue has been earned, but the cash has not yet been received Example: On December 30, we sold $1000 on credit. Cash was received in January. In December: Accounts Receivable Increases 1000 Revenue (Sales) Increases 1000 December Income Statement Revenue (Sales) 1000 Expenses XXX Profit +1000 December Balance Sheet Assets Increase (Accounts Receivable) 1000 Owners Equity (Retained Profit) Increases 1000 In January: Accounts Receivable Decreases 1000 Cash Increases 1000 January Income Statement NO EFFECT January Balance Sheet Assets Increase (Cash) 1000 Assets Decrease (Accounts Receivable) 1000    Unearned Revenue: Cash has been received, but revenue has not been earned. Example: On December 30, we receive a $1000 cash deposit for work to be completed in January. In January, we complete the work. In December: Cash Increases 1000 Unearned Revenue Increases 1000 December Income Statement NO EFFECT December Balance Sheet Assets Increase (Cash) 1000 Liabilities (Unearned Revenue) Increases 1000 In January: Liabilities Decrease 1000 Revenue Increases 1000 January Income Statement Revenue (Sales) 1000 Expenses XXX Profit +1000 January Balance Sheet Liabilities (Unearned revenue) decrease 1000 Owners Equity (Retained Profit) Increases 1000 Accrual Accounting for Expenses Accrued Expenses: Goods or services are used, but not yet paid for. Example: In December we use electricity, but do not receive the electricity bill until January. In January the bill is paid. (Electricity from January  –  November cost $1,100, therefore, we can estimate that December electricity will cost about $100). In December: Accrued expenses increase 100 Electricity expense Increases 100 December Income Statement Revenue (Sales) XXXX Expenses (100) Profit -100 December Balance Sheet  Liabilities Increase (Accrued Expense) 100 Owners Equity (retained profit) decreases 100 In January: Assets Decrease 100 Liabilities Decrease 100 January Income Statement NO EFFECT January Balance Sheet Assets (Cash) decrease 100 Liabilities decrease (accrued expenses) 100 Prepaid Expenses: Money paid for goods or services in advance, the expense has not yet been incurred. Example: On December 30 we pay $100 for January’s rent.  In December: Prepaid expenses increase 100 Cash decreases 100 December Income Statement NO EFFECT December Balance Sheet Assets Increase (prepaid expense) 100 Assets decrease (cash) 100 In January: Expenses Increase 100 Assets Decrease 100 January Income Statement Revenue (Sales) XXXX Expenses (100) Profit -100 January Balance Sheet Assets Decrease (Prepaid Expense) 100 Owners Equity (retained profit) decreases 100
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