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Understanding Cash and Accrual Accounting Methods

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bmclean
12 diapositives · 336 Views · Jan 02, 2020

Learn the differences between cash and accrual basis accounting, their impacts on financial statements, and applications in taxation and business accounting. Practice recording transactions and preparing income statements.

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Understanding Cash and Accrual Accounting Methods
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  1. Cash Accounting VS Accrual Accounting

  2. Revision • Solutions to the cross - word

  3. Cash accounting • Cash accounting / cash basis • Accountants record transactions... • when cash is paid, • or when cash is received, • regardless of when a revenue is earned or an expense is incurred.

  4. Accrual Accounting • Accrual accounting / accrual basis • Accountants record transactions... • when revenues are earned, • or when expenses are incurred, • regardless of when cash changes hands. • GAAP requires that a business uses the accrual basis.

  5. Dennis’ Landscaping • Services performed during the month of July - $15,000. • Cash collected from customers - $6,000. • Expenses incurred for the month - $12,000. • Cash paid out - $9,000.

  6. Cash Basis • Revenues are the cash collected from customers - $6,000. • Expenses are the cash paid out during the month - $9,000. • Dennis’ Landscaping lost $3,000 during the month of July.

  7. Accrual Basis • Revenues of $15,000 are recognized for the services performed during the month. • Expenses are the $12,000 incurred during the month. • Dennis’ Landscaping made a profit of $3,000.

  8. Dennis’ Landscaping P & L Statement For the Month Ended 31 July Revenues $15,000 Expenses 12,000 Net Profit $ 3,000 Cash Accrual Dennis’ Landscaping P & L Statement For the Month Ended 31 July Revenues $6,000 Expenses 9,000 Net Loss $3,000

  9. Application • Taxation • GST (cash basis or accrual basis) • Income tax • individual: cash basis, e.g. 5 year term deposit • Business: accrual basis

  10. Application • Business accounting • Accrual basis according to GAAP • however as to the daily accounting, not strict accrual basis, recording transactions according to having source documents or not • Do the required adjustments on the balance day

  11. Questions • What is the difference between cash basis and accrual basis? • If you were asked to provide advice to a plumber on which method she should use to record her financial records, which method would you suggest and why?

  12. Exercise Indooroopilly Hotel had the following selected transactions during January: Jan. 1 Prepaid rent for three months (Jan to March), $2700 Jan. 5 Paid electricity expenses for Dec last year, $400 Jan. 9 Received cash for the day’s room rentals, $1400 Jan. 14 Paid cash for six television sets, $3000 Jan. 23 Served a banquet to a customer, issuing a bill of $1200 Jan. 31 Accrued salary expense, $900 • Requirement • Show how each transaction would be recorded under the accrual accounting and the cash accounting • Prepare the income statement for Jan under accrual accounting and cash accounting.