MUHASEBE I

Accrual basis accounting records the impact of a business transaction as it occurs. When the business performs a service, makes a sale, or incurs an expense, the transaction will be recorded even if the business did not receive or did not pay any cash. In accrual basis accounting, companies record revenues when they are earned and record expenses when they are incurred.

Revenue is the gross increase in owner’s
equity from delivering goods or services to
customers and clients.

Expense is the cost of assets consumed or
services used during the revenue earning
process.

If cash is received in advance, a liability account will be used as a correspondence to cash account, a liability account called deferred revenue is used as a correspondence to cash account.

In accrued revenue, revenue is recognized
before the cash is received.

In deferred expense (prepaid expense),
expense is recognized after the cash is paid.

In accrued expense, expense is recognized
before the cash is paid.

Book Value of an asset is the depreciable
asset’s cost minus the asset’s accumulated
depreciation.

In cash basis accounting, companies record revenues when they receive the cash and they record expenses when the cash is paid. Cash basis accounting records only cash transactions—cash receipts and cash payments. Basically, it is a simple method. But it prevents businesses from being cautious. Companies adopting cash basis accounting focus only transactions involving cash. Those with no monetary input are not taken into consideration. It is possible to say that cash basis accounting is mostly used by small businesses.

The time-period concept (or alternatively periodicity concept) assumes that unlimited economic life of a company will be divided into artificial time periods and that financial statements can be prepared for specific periods such as a month, quarter, or year.

In revenue recognition principle, revenue is recorded when it is earned, not when the cash is
received just the same as the accrual basis accounting.

If cash is received in advance (before revenue is earned), a liability account (called as deferred revenue) will be used as a correspondence to cash account, a liability account called deferred revenue is used as a correspondence to cash account.

At the end of each accounting period, companies present their financial statements in order to communicate with information users. To present the company’s true and fair situation all accounts must be updated because recording some revenue and expense transactions are omitted during the period. That means some accounts must be adjusted, and some adjusting entries must be made.

The two basic categories of adjustments can be divided into four different types as follows:

Deferred expenses are the ones that are firstly paid and reported as an asset but will not be recorded as an expense until a future accounting period.

Value and usefulness of plant assets will decline when the business uses them in its operations. The decline in usefulness of a plant asset is an expense which is called as a  expense. Here the concept of depreciation emerges. Depreciable amount is the cost of an asset minus its residual value, and depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.  In other words, depreciation is a cost allocation process over the plant asset’s useful life.

Some types of services, such as insurance, are normally paid for before they are used. As you learned before, these prepayments are deferrals. Rent, interest, salaries, wages, utilities, etc. are the other examples of accrued expenses over time. Expenses incurred but not yet paid or recorded at the end of the accounting period are accrued expenses. Accrued expenses are the ones that are firstly incurred and not recorded as an expense until a future accounting period. Because of the unnecessity, such kinds of expenses are not required for daily recordings. For that reason, companies do not recognize them until the preparation of financial reports. The amount of such an accrued but unpaid item at the end of the accounting period is both an expense and a liability.

In cash basis accounting, companies record revenues when they receive the cash and they record expenses when the cash is paid. Cash basis accounting records only cash transactions—cash receipts and cash payments. Basically, it is a simple method. But it prevents businesses from being cautious. Companies adopting cash basis accounting focus only transactions involving cash. Those with no monetary input are not taken into consideration. It is possible to say that cash basis accounting is mostly used by small businesses.