Builder's Guide to Accounting 02

Question 1

1. What is ACCRUAL ACCOUNTING?

Answer 1

Accrual accounting records business events as they occur regardless of whether the trasaction affected cash. Revenues are recorded when they are earned regardless of when the cash is collected and matched against Expenses that are recorded as they are incurred regardless of when they are paid.

Question 2

2. What is the COMPLETED CONTRACT METHOD?

Answer 2

ALL income is recognized only when the job is 100% complete.

Question 3

3. When do you use the COMPLETED CONTRACT METHOD?

Answer 3

On small jobs, when payment is usually received in one installment.

Question 4

4. You can use COMPLETED CONTRACT ACCOUNTING only when:

Answer 4

you’ll complete a job within TWO YEARS of contract date, and ONLY if your annual gross receipts are under 10 million.

Question 5

5. What is the PERCENTAGE OF COMPLETION/CAPITALIZED COST METHOD?

Answer 5

Undet this rule, you are allowed to use COMPLETED CONTRACT ACCOUNTING for only 60% of the total income and expenses of a job. The balance must be reported under the STRAIGHT PERCENTAGE OF COMPLETION method.

Question 6

6. Which of the two methods of accounting can you maintain on an ACCRUAL SYSTEM?

Answer 6

BOTH.

That means that Income, Costs, Revenues, and Expenses are placed in the books when they are EARNED or INCURRED.

Question 7

7. So if a customer buys from you but hasn’t paid you yet, you:

Answer 7

ACCURE the account as a RECEIVABLE and you ACCRUE the income as EARNED INCOME.

Question 8

8. What does it mean to ACCRUE?

Answer 8

Accrual means something that you are entitled to get but is not given to you UNTIL SOMETIME IN THE FUTURE. Like in a Fixed Deposit with compound interest payable on maturity, the accured interest is computed year wise for taxation, but the amount is not paid till maturity.