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.
accountant simply increases or decreases the cash account and records the offsetting entry to the
For example, assume the following transactions occurred during August 2010:
The company sold common stock for $10,000.
The company generated $6,000 of revenue.
The company borrowed $75,000 from a local bank and signed a note payable.
The company paid $4,000 in expenses
The company paid $60,000 to acquire land.
Accounting Equation for August 2010
= Liabilities + Stockholders' Equity
Notes Common Retained
Event Cash Land = Payable + Stock Earnings Revenue Expense
1. Issued Stock 10,000
2. Revenue 6,000
3. Loan 75,000
4. Paid Expenses (4,000)
5. Purchased Land (60,000)
Accrual Basis of Accounting
In the real world, the majority of transactions that take place are not cash transactions.
purchase items using credit cards, they receive services in one month and pay for them in the following
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
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.