Accrual Accounting Flashcards
Accrual to Cash
A decrease in liabilities & increase in assets is deducted to accrual accounting to get to cash,
An increase in liabilities and a decrease in assets is added to accrual accounting to get to cash.
Allowances for doubtful accounts does nothing, but the actual write-offs need to be deducted.
Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of
A decrease in the accounts receivable balance would generally mean that cash was collected. In accordance with the cash basis of accounting when cash is received it is recorded as revenue (Dr. Cash, Cr. Revenue), whereas under the accrual basis the revenue would have been recorded when the receivable was recorded (Dr. AR, Cr. Revenue). Thus, a decreased accounts receivable balance would result in increased revenue/income. Therefore, the answer for this account is No.
A decrease in the accrued expenses account would generally mean cash was paid on some expenses. Under the cash basis, when the cash is paid the expense is recorded (Dr. Expense, Cr. Cash), whereas under the accrual basis the expense would have been recorded when the accrued expense was recorded (Dr. Expense, Cr. Accrued Expense). Thus, a decreased accrued expenses account would result in increased expenses/lower income for the cash basis. Thus, the answer for this account is Yes.
Wright Company sells for cash major household appliance service contracts agreeing to service customers’ appliances for a 1-year, 2-year, or 3-year period. Cash receipts from contracts are credited to unearned service contract revenues and this account had a balance of $1,440,000 at December 31, year 1, before year-end adjustment. Service contract costs are charged to service contract expense as incurred and this account had a balance of $360,000 at December 31, year 1. Outstanding service contracts at December 31, year 1, expire as follows:
During year 2 $300,000
During year 3 450,000
During year 4 200,000
What amount should Wright report as unearned service contract revenues at December 31, year 1?
This answer is incorrect. The amount reported in this liability account should be the total amount of outstanding service contracts at 12/31/Y1, or $950,000 ($300,000 + $450,000 + $200,000). Wright’s 12/31/Y1 adjusting entry would reduce the liability account from $1,440,000 to $950,000.
Unearned service contracts revenue 490,000
Service contracts revenue 490,000
How are prepaid expenses treated for cash VS. accrual accounting?
Under the accrual to cash, prepaid expense would be
Accrual basis accounting?
recognizes and reports the economic activities of the firm in the period the activity was incurred, regardless of when the cash activity takes place.
