F2M7 Flashcards
Special Purpose Frameworks
Special Purpose frameworks aka other comprehensive basis of account (OCBOA):
cash, modified cash, tax, or regulatory basis of accounting are the most common
Difference in revenue and expense recognition between cash basis and accrual basis
Cash basis: revenue recognized when cash received, and expense is recognized when cash is paid
Accrual basis: revenue recognized when it is realized or realizable and earned, and expense is recognized when it is incurred/owed/benefit is received.
formula for converting cash basis revenue to accrual basis revenue
Cash Basis Revenue
+ Ending Accounts Receivable
– Beginning Accounts Receivable
– ending unearned revenue
+ beginning unearned revenue
= Accrual Basis revenue
formula for converting cash paid for purchases (cash basis) to cost of goods sold (accrual basis)
Cash paid for purchases + ending accounts payable – beginning accounts payable – ending inventory + beginning inventory = Cost of goods sold.
Formula for converting cash paid for operating expenses to accrual basis operating expenses
cash paid for operating expense + ending accrued liabilities – beginning accrued liabilities – ending prepaid expenses + beginning prepaid expenses = Accrual basis operating expenses
This formula can be used to convert any operating expense (ex: wages payable) from cash basis to accrual basis. Can also be used to determine accrual basis interest payable or income taxes payable.
Quick thoughts on cash to accrual basis
Add increases in current assets (ex: AR, earned more revenue but havent collected cash)
Add decreases in current liabilities (ex: AP, cash was paid for the liability (expensed when cash is paid under cash basis) but the liability was already recognized previously under accrual basis and should not be recorded again.
like in accrual basis when there is an accounts payable it gets expensed. however, under cash basis it does not get expensed until cash is actually paid for the liability. So when the balance of AP goes down (meaning cash was paid) that means in that period under cash basis they would now record the accounts payable. But under accrual basis it was already accounted for another year.
Quick thoughts on accrual basis to cash basis
is accounts payable decreased during the year, what does that mean?
The cash paid out was greater than the accrued expenses for the year.
Accounting for accrued liabilities for converting from cash basis to accrual basis
accrued liabilities: expense has been incurred but no cash has been paid.
if accrued liabilities increase during the year that means more expenses have been incurred than that have been paid for.
if accrued liabilities increase under cash basis, they are added to get to accrual basis.
