Explain how profit is measured and reported under the accrual and cash bases of accounting 2. For example, a company could perform work in one year and not receive payment until the following year. Later, when the company receives the cash, no revenue is recorded because the company has already recorded the revenue. As no cash is received at this point, the debit entry goes to the accounts receivable account, representing money due from the customer. The interest is payable on yearly basis on June 30 each year. Electricity Expenses. The accrual basis of accounting is the concept of recording revenues when earned and expenses as incurred. You need to receive this from other people. Unearned Revenue. What are the components of the accounting equation? Journal entries to record the receipt of revenue on receipt date involve a debit to cash or bank and credits to accounts receivable for the accumulated revenue accrued and to revenue for the any additional accrual during the accounting period. What does a journal entry look like when cash is received? Journal Entry: DR Prepaid-Insurance $1200 CR Cash $1200. Transactions involving the receipt and disbursement of money occur in the Accounts Receivable and Accounts Payable systems. Accruals and deferrals are the basis of the accrual method of accounting. This is called the matching principle. Accrued Expenses. 2. So in the accrual basis of accounting, would say that you earned $400 of revenue, even though the customer did not pay you. Accruals are created via adjusting journal entries at the end of each accounting period. Under cash basis accounting, expenses are recognized when cash is paid. An expense is the outflow or using up of assets in the generation of revenue. Journal entries to record inventory transactions under a perpetual inventory system, Journal entries to record inventory transactions under a periodic inventory system, Disposal of Property, Plant and Equipment, Research and Development Arrangements, ASC 730, Distinguishing Liabilities from Equity, ASC 480, Fair Value Measurements and Disclosures, ASC 820, List of updates to the codification topic 820, Exit or Disposal Cost Obligations, ASC 420, Costs of software to be sold, leased, or marketed, ASC 985, Revenue Recognition: SEC Staff Accounting Bulletin Topic 13, ASC 605, Servicing Assets and Liabilities, ASC 860, Translation of Financial Statements, ASC 830, Consolidation, Noncontrolling Interests, ASC 810, Consolidation, Variable Interest Entities, ASC 810, Compensation: Stock Compensation, ASC 718, Asset Retirement and Environmental Obligations, ASC 410, Journal entry to record the collection of accounts receivable previously written-off, Journal entry to record the write-off of accounts receivable, Journal entry to record the estimated amount of accounts receivable that may be uncollectible, Journal entry to record the collection of accounts receivable, Investments-Debt and Equity Securities, ASC 320, Transfers of Securities: Between Categories, ASC 320, Overview of Investments in Other Entities, ASC 320, Investments: Equity Method and Joint Ventures, ASC 323, Investments in Debt and Equity Securities, ASC 320, Journal entry to record the sale of merchandise on account, Accounting Changes and Error Corrections, ASC 250, Income Statement, Extraordinary and Unusual Items, ASC 225, Presentation of Financial Statements, Discontinued Operations, ASC 205, Presentation of Financial Statements, ASC 205, Generally Accepted Accounting Principles, ASC 105, Journal entry to record the sale of merchandise in cash, Journal entry to record the purchase of merchandise, Journal entry to record the payment of rent, Generally Accepted Accounting Principles (GAAP), Journal entry to record the payment of salaries, Extraordinary and Unusual Items, ASU 2015-01, Journal entry to record the purchase of equipment, Journal entry to record the investment by owner. Accrual accounting and adjusting entries, Chapter 4. Adjusting journal entries can get complicated, so you shouldn’t book them yourself unless you’re an accounting expert. What are the key financial ratios for profitability analysis? Although these time-period reports provide useful and timely financial information for investors and creditors, they may be inaccurate for some of these time periods because accountants must estimate depreciation expense and certain other adjusting entries. Trial Balance. Time-Period Assumption. Periodicity Assumption: Accounting divides the economic life of a business into artificial time periods (ex: month, quarter, or year) o Fiscal Year: an accounting … Because the cash basis of accounting does not match expenses incurred and revenues earned in the appropriate year, it does not follow Generally Accepted Accounting Principles (GAAP). Journals and Ledgers. Journal Entries. 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