Cash vs. Accrual Accounting
This accounting method records revenues when cash is received and expenses when cash is paid.
What is cash-basis accounting?
Adjusting entries update these two types of accounts at period-end.
What are assets and liabilities?
Paying rent in advance creates this type of account.
What is prepaid rent?
Salaries earned but not yet paid create this liability?
What is salaries payable?
Deferred revenue is created when a company receives this before providing services.
What is cash?
Under this method, revenues are recorded when goods or services are provided, not when cash is received.
What is accrual-basis accounting?
This type of adjusting entry occurs when cash is paid before the expense is used.
What are prepaid expenses?
Rent of $60,000 is paid for 12 months. One month expires by December 31. This is the rent expense
What is $5,000?
Utilities used but unpaid at year-end require this adjusting entry.
What is debit utilities expense and credit utilities payable?
Deferred Revenue is classified as this type of account.
What is a liability?
This is the key difference between cash-basis and accrual-basis accounting.
What is timing?
Accrued revenues occur when services are provided, but this has not yet been received.
What is cash?
Supplies costing $23,000 are purchased. Only $13,000 remains at year-end. This is the amount of the adjusting entry.
What is $10,000?
Interest on a $100,000 note at 12% for one month equals this amount.
What is $1,000?
If $6,000 is received in advance and $2,000 of services are provided, this amount remains as deferred revenue.
What is $4,000?
A company performs services in December but receives cash in January. Under accrual accounting, revenue is recorded in this month.
What is December?
Adjusting entries are unnecessary when revenue and expenses are recorded at the same time as this event.
What is the cash flow?
Equipment costing $120,000 depreciates over 60 months. Identify the adjusting entry accounts and the monthly depreciation amount.
What is Depreciation Expense $2,000 and Accumulated Depreciation $2,000?
Accrued revenues increase this account because the company has the right to receive payment.
What is accounts receivable?
When services are provided for customers who paid in advance, this account is credited.
What is service revenue?
Cash-basis accounting is not allowed under GAAP primarily because it fails to match these two elements properly
What are revenues and expenses?
Explain why adjusting entries are required even if no cash is exchanged during the period.
What is to ensure that revenues and expenses are recorded in the correct period under accrual accounting?
Explain why prepaid expenses decrease over time even though no additional cash is paid.
What is because the asset is consumed, and the cost must be recognized as an expense?
Students often mistakenly credit Notes payable when recording interest. Explain why this is incorrect.
What is because interest is a separate obligation and must be recorded in interest payable to keep principal and interest distinct?
Explain why deferred revenue decreases when services are provided even though no additional cash is received.
What is because the company has fulfilled part of its obligation, reducing the liability and recognizing revenue?