Chapter 2 Cash & Accrual Accounting

Question 1

What is cash accounting?

What is accrual accounting?

What is the difference?

Answer 1

Cash Accounting
Records only cash transactions

Accrual Accounting:
Records events in the period in which they occur, regardless of when cash receipts or payments occur.

The difference is that in accrual accounting, transactions are recorded when they are incurred as compared to cash accounting when transactions are only recorded when cash is received/spent

Question 2

What are the two concepts surrounding accrual accounting?

Answer 2

1) Time period concept
- Economic life of a business can be broken into many different time periods

2) Revenue Recognition Concept
- Recognise revenue when revenue is incurred

Question 3

What are the three categories of adjusting entries?

Answer 3

1) Deferrals
- Unearned revenue (Cash received before revenue is earned)
- Prepaid expenses (Cash paid in advance before expense is incurred)

2) Accruals
- Accrued Revenue (Revenue earned through performance but yet to receive)
- Accrued Salary (Expenses incurred buy yet to pay)

3) Depreciation

Question 4

On 1st June 2018, ABC company paid for two months worth of rent in advance. What are the journal entry to record and adjust this.

Answer 4

To record:

DR Prepaid Rent Expense
CR Cash

To Rectify

30 June
DR Rent Expense
CR Prepaid Rent Expense

31st July
DR Rent Expense
CR Prepaid Rent Expense

Question 5

On 20 June 2018, ABC company received $1500 from a customer for services meant to be performed in 31st July 2018. What are the journal entries?

Answer 5

To Record
20 June 2018
DR Cash
CR Unearned Service Revenue

To Rectify
31st July 2018
DR Unearned Service Revenue
CR Service Revenue

Question 6

ABC company pays its employees on the 2nd of each month for work done on the previous month. Monthly salary expenses are $2500. What are the journal entries?

Answer 6

To Record
30 June
DR Salary Expense
CR Salary Payable

2nd July
DR Salary Payable
CR Cash

Question 7

ABC company bought an equipment that cost $120,000 in 2019 and depreciates yearly on a straight line basis with zero residual value. What are the journal entries to record this depreciation in 2020, yearly depreciation is $10,000

Answer 7

31st Dec 2020
DR Depreciation Expense
CR Accumulated Depreciation