Accruals - Key Things to Know-2010 (1)

Accruals - Key Things to Know-2010 (1) - AC 205 Chapter 2...

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1 AC 205 Chapter 2 Accruals - Key Things to Know Cash Basis Accounting Transactions are often recorded at the time cash is received or paid. This is called recording the transactions on the cash basis of accounting . When this happens, recording the transaction is easy. The accountant simply increases or decreases the cash account and records the offsetting entry to the appropriate account. For example, assume the following transactions occurred during August 2010: Transaction 1: The company sold common stock for $10,000. Transaction 2: The company generated $6,000 of revenue. Transaction 3: The company borrowed $75,000 from a local bank and signed a note payable. Transaction 4: The company paid $4,000 in expenses Transaction 5: The company paid $60,000 to acquire land. FMC CONSULTING Accounting Equation for August 2010 = Liabilities + Stockholders' Equity Notes Common Retained Event Cash Land = Payable + Stock Earnings Revenue Expense 1. Issued Stock 10,000 10,000 2. Revenue 6,000 6,000 3. Loan 75,000 75,000 4. Paid Expenses (4,000) (4,000) 5. Purchased Land (60,000) 60,000 Totals 27,000 60,000 = 75,000 + 10,000 - 6,000 (4,000) Assets Accrual Basis of Accounting In the real world, the majority of transactions that take place are not cash transactions. People purchase items using credit cards, they receive services in one month and pay for them in the following month. The companies that provide the goods and services have provided the services “on account”. This means that while the company has earned the related revenue, the company will not collect the cash payments until a later month. Under GAAP accounting rules these transactions require journal entries to record the transactions even though cash has not yet exchanged hands. These types of journal entries are called a ccruals. The purpose of accrual journal entries is to match revenues and expenses. Matching requires that expenses incurred during a month should be matched with revenues generated for the same month regardless of whether cash has been paid or received for the same period.
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Accruals - Key Things to Know-2010 (1) - AC 205 Chapter 2...

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