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Cash Accounting VS Accrual Accounting

Cash Accounting VS Accrual Accounting. Revision. Solutions to the cross - word. Cash accounting. Cash accounting / cash basis Accountants record transactions... when cash is paid, or when cash is received, regardless of when a revenue is earned or an expense is incurred.

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Cash Accounting VS Accrual Accounting

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  1. Cash Accounting VS Accrual Accounting

  2. Revision • Solutions to the cross - word

  3. Cash accounting • Cash accounting / cash basis • Accountants record transactions... • when cash is paid, • or when cash is received, • regardless of when a revenue is earned or an expense is incurred.

  4. Accrual Accounting • Accrual accounting / accrual basis • Accountants record transactions... • when revenues are earned, • or when expenses are incurred, • regardless of when cash changes hands. • GAAP requires that a business uses the accrual basis.

  5. Dennis’ Landscaping • Services performed during the month of July - $15,000. • Cash collected from customers - $6,000. • Expenses incurred for the month - $12,000. • Cash paid out - $9,000.

  6. Cash Basis • Revenues are the cash collected from customers - $6,000. • Expenses are the cash paid out during the month - $9,000. • Dennis’ Landscaping lost $3,000 during the month of July.

  7. Accrual Basis • Revenues of $15,000 are recognized for the services performed during the month. • Expenses are the $12,000 incurred during the month. • Dennis’ Landscaping made a profit of $3,000.

  8. Dennis’ Landscaping P & L Statement For the Month Ended 31 July Revenues $15,000 Expenses 12,000 Net Profit $ 3,000 Cash Accrual Dennis’ Landscaping P & L Statement For the Month Ended 31 July Revenues $6,000 Expenses 9,000 Net Loss $3,000

  9. Application • Taxation • GST (cash basis or accrual basis) • Income tax • individual: cash basis, e.g. 5 year term deposit • Business: accrual basis

  10. Application • Business accounting • Accrual basis according to GAAP • however as to the daily accounting, not strict accrual basis, recording transactions according to having source documents or not • Do the required adjustments on the balance day

  11. Questions • What is the difference between cash basis and accrual basis? • If you were asked to provide advice to a plumber on which method she should use to record her financial records, which method would you suggest and why?

  12. Exercise Indooroopilly Hotel had the following selected transactions during January: Jan. 1 Prepaid rent for three months (Jan to March), $2700 Jan. 5 Paid electricity expenses for Dec last year, $400 Jan. 9 Received cash for the day’s room rentals, $1400 Jan. 14 Paid cash for six television sets, $3000 Jan. 23 Served a banquet to a customer, issuing a bill of $1200 Jan. 31 Accrued salary expense, $900 • Requirement • Show how each transaction would be recorded under the accrual accounting and the cash accounting • Prepare the income statement for Jan under accrual accounting and cash accounting.

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