Accrual Accounting

Question 1

An accrual

Answer 1

earned revenue and incurred expenses, but NO CASH exchange.
An accrual is a transaction in which the revenue has been earned or the expense has been incurred, but no cash has been exchanged. When the substance of a business transaction takes place before any cash changes hands, the accountant includes that transaction in the measurement of income. That is, if a firm has earned revenue, that revenue must be included on the income statement. If the firm incurred an expense to earn that revenue, that expense must be included on the income statement. Accruals can pertain to both revenues and expenses.

Question 2

why timing is everything in accounting?

Answer 2

Accountants consider the continuous life of a business as being composed of discrete periods of time—months, quarters, or years. The way we divide the revenues and expenses among those time periods is a crucial part of accounting. That is why timing is everything in accounting. If revenue is earned (not necessarily collected) in a certain time period, you must be sure that it is included on the income statement for that period—not the one before and not the one after. Sometimes you will see the income statement referred to as the statement of operations and other times as the statement of earnings or the profit and loss statement.

Question 3

Timing differences in accounting are differences between

Answer 3

1. the time when a company earns revenue by providing a product or service to customers and the time when the cash is collected from the customers,
   and
2. the time when the company incurs an expense and the time when the company pays for the expense.

Question 4

examples of accruals

Answer 4

Sales on credit, purchases on credit,

interest accrued on loans, interest revenue, interest expense

Question 5

Adjustments for accruals

Answer 5

Accruals that need to be made before the financial statements are prepared are “adjustments to the books.”
1. Revenue earned that has not been billed
(no receivable has been recorded)
2. Interest revenue that has been earned on loans that has not been recorded
3. Expenses that have been incurred (used) but have not been recorded (salary expense)

At the end of the accounting period—usually a year—we review the accounting and business records to see if there are any revenues or expenses that we should recognize even though the dollars have not yet been exchanged. (Remember, accrual means the action has happened but the dollar exchange hasn’t yet taken place.)
This process—checking for needed adjustments and making them—must take place before accurate financial statements can be prepared.

Question 6

Sales of goods and services on account

Answer 6

When the firm recognize revenue and accounts receivable.

Question 7

Accounts receivable

Answer 7

Accounts Receivable: The amounts owed by customers for goods and services for sales on account, the most common accrual transaction.
The revenue is recorded at the time of sale, but the cash for the sale will be collected later. Recording revenue with an increase in accounts receivable is called accruing revenue.

Question 8

Interest

Answer 8

Another common accruals. Interest is the cost of borrowing money
Interest—both interest revenue and interest expenses.
The specific dates are CRUCIAL. If we have borrowed or loaned money during an accounting period, we will have to accrue interest expense or interest revenue. That’s because interest is related to time—the time over which we use someone else’s money or someone uses our money.
If money is borrowed, interest expense and interest payable (a liability) are recorded.
If money is loaned, interest revenue and interest receivable (an asset) are recorded.
Interest rates always pertain to one year. For loan periods of less than one year, interest will be due for a fraction of one year (6 months, 6/12).

Question 9

Recognizing a revenue or expense means ?

Answer 9

Recognition of the event versus realization of cash. Recognizing a revenue or expense means to record it in the accounting records so that it appears on the income statement.
Realized means the cash is collected. Sometimes revenue is recognized in one accounting period and realized in a different accounting period.

Question 10

Income stmt is accrual ?

Answer 10

Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.
Under the accrual basis of accounting, revenues are reported on the income statement when they are earned.