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ACCRUAL ACCOUNTING

ACCRUAL ACCOUNTING. Presented by Campus Services. ACCRUAL ACCOUNTING. WELCOME!!! Valerie Monahan Heidi Barclay. Accounting Methods. All organizations must choose an accounting method for financial reporting purposes. Accounting Methods. What is an accounting method?

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ACCRUAL ACCOUNTING

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  1. ACCRUAL ACCOUNTING Presented by Campus Services

  2. ACCRUAL ACCOUNTING WELCOME!!! Valerie Monahan Heidi Barclay

  3. Accounting Methods All organizations must choose an accounting method for financial reporting purposes

  4. Accounting Methods What is an accounting method? • The way financial events are recorded • Revenue / cash received • Expenses / cash paid • The way financial position is reported • Financial statements

  5. Accounting Methods There are two basic types of accounting methods: • Cash • Income is recorded when cash/check is received • Expenses are recorded when the vendor is paid • Accrual • Income is recorded when the sale occurs • Expenses are recorded when the goods or services are received (and used)

  6. Why Does the method Matter? • Government entities (including universities) are required to follow GASB standards What is GASB? • Government Accounting Standards Board • GASB establishes accounting and financial reporting standards for government units

  7. Why Does the method Matter? • GASB Statement No. 34 requires the use of the accrual accounting method • Since governments are required to follow GASB standards, CSU is required to use the accrual accounting method

  8. Cash Method

  9. Cash Method • Sometimes expenses are purchased in advance and used over future months • Service contracts • Medical/lab supplies

  10. Cash Method • Expenses aren't recorded until the money is actually paid out -- even if the actual expenses were incurred in previous months • Revenues are recorded when cash is received

  11. Cash Method – Revenue Example Fiscal year end is 6/30/07 (FY07) Cash Revenue Debit Debit Credit Credit $200 (FY 08) $200 (FY 08) 4/30/07 Receive order -- test blood sample 5/31/07 Test results completed and invoiced 7/2/07 Customer pays invoice – cash deposit made in following fiscal year (FY08)

  12. Cash Method – Expense Example Fiscal year end is 6/30/07 (FY07) Cash Expense Debit Debit Credit Credit $50 (FY 08) $50 (FY 08) 4/30/07 Place order for lab supplies 5/31/07 Receive supplies and use them 7/2/07 Pay the vendor invoice in following the following fiscal year (FY08)

  13. Accrual Method

  14. Accrual Method • The term accrual refers to any individual entry recording revenue or expense in the absence of a cash exchange

  15. Accrual Method • Accruals are recorded on the transaction date • Transaction date is when a financial event occurs whether or not cash is exchanged • Services are performed (diagnostic testing) • Product is sold (books) • Inventory is received

  16. accrual Method – Revenue Example Fiscal year end is 6/30/07 (FY07) Cash Accts Receivable Revenue Debit Debit Debit Credit Credit Credit $200 (FY 08) $200 $200 (FY 08) $200 4/30/07 Receive order -- test blood sample 5/31/07 Test results completed and invoiced 7/2/07 Customer pays invoice – cash deposit made in following fiscal year (FY08)

  17. accrual Method – Expense Example Fiscal year end is 6/30/07 (FY07) Accts Payable Debit Credit Cash Expense Debit Debit Credit Credit $50 (FY 08) $50 (FY 08) $50 $50 4/30/07 Place order for lab supplies 5/31/07 Receive supplies and use them 7/2/07 Pay the vendor invoice in the following fiscal year (FY08)

  18. Cash vs. Accrual • Within this simple difference lies a lot of room for error — or manipulation. • Depending on which method is used, financial reporting may be affected at the financial year end

  19. Cash vs. Accrual FY07 Subledger Revenue $0 Expense $0 Net Income $0 Subledger Revenue $200 Expense $ 50 Net Income $150 Cash Method Accrual Method

  20. Cash vs. Accrual FY07 General Ledger Cash $0 Fund Balance $0 General Ledger Cash $ 0 Accts Receivable $200 Accts Payable $ 50 Fund Balance $150 Cash Method Accrual Method

  21. Cash vs. Accrual FY08 Subledger Revenue $200 Expense $ 50 Net Income $150 Subledger Revenue $0 Expense $0 Net Income $0 Cash Method Accrual Method

  22. Cash vs. Accrual FY08 General Ledger Cash $150 Fund Balance $150 General Ledger Cash $150 Accts Receivable $ 0 Accts Payable $ 0 Fund Balance $150 Cash Method Accrual Method

  23. Other Accruals - Assets • Prepaid Expenses • Service contracts • Paid once per year • Should be expensed in 12 equal amounts • Example: • Service contract $1,800 paid for on 4/1/07 • Contract covers 1 year: 4/1/07 – 3/31/08

  24. Cash Method – Service Contract Fiscal year end is 6/30/07 (FY07) Cash Expense Debit Credit Debit Credit $1,800 $1,800 4/1/07 Pay for 1 year service contract 4/30/07 Use 1 month’s contract expense 5/31/07 Use 1 month’s contract expense 6/30/07 Use 1 month’s contract expense

  25. accrual Method – Service contract Fiscal year end is 6/30/07 (FY07) Cash Prepaid Expenses Expense Debit Credit Debit Credit Debit Credit $1,800 $1,800 $150 $150 $150 $150 $150 $150 $1,350 $1,650 $450 $150 4/1/07 Pay for 1 year service contract 4/30/07 Record 1 month’s contract expense 5/31/07 Record 1 month’s contract expense 6/30/07 Record 1 month’s contract expense

  26. accrual Method – Service Contract Fiscal year end is 6/30/07 (FY07) Cash Prepaid Expenses Expense Debit Credit Debit Credit Debit Credit $1,800 $1,800 $150 $150 $150 $150 $150 $150 $1,350 $450 4/1/07 Pay for 1 year service contract 4/30/07 Record 1 month’s contract expense 5/31/07 Record 1 month’s contract expense 6/30/07 Record 1 month’s contract expense

  27. Other Accruals - Assets FY07: Service Contract Expense $1,800 FY08: Service Contract Expense $ 0 FY07: Service Contract Expense $ 450 FY08: Service Contract Expense $ 1,350 Cash Method Accrual Method

  28. Other Accruals - Assets • Service Contracts • Service contract expense – FY07 • Cash method = $1,800 • Accrual method = $450 • Service contract expense – FY08 • Cash method = $0 • Accrual method = $1,350

  29. Other Accruals - Assets • Deposits • CSU Contracts with an outside party who requires a deposit. • ½ is often required in advance – may be refundable • An expense is not booked until the event takes place

  30. Other Accruals - Liabilities • Deferred Revenue • Sports/youth camps are paid in advance • Revenue isn’t earned until the camp takes place • Example: • 2 week camp costs $500 ($50 per day) • Dates of the camp are 6/25/07 – 7/6/07 (M-F)

  31. Cash Method – Camp Example Fiscal year end is 6/30/07 (FY07) Cash Revenue Debit Credit Debit Credit $500 $500 $500 5/15/07 Participant signs up for 2 week camp – deposit $500 6/25/07 Camp begins 7/6/07 Camp Ends

  32. accrual Method – Camp Example Fiscal year end is 6/30/07 (FY07) Cash Deferred Revenue Revenue Debit Credit Debit Credit Debit Credit $500 $250 $500 $250 $250 $250 5/15/07 Participant signs up for 2 week camp – deposit $500 6/25/07 Camp begins 6/30/07 Record camp revenue earned in FY07 (5 days)

  33. Other Accruals - Liabilities FY07: Camp Revenue $500 FY08: Camp Revenue $ 0 FY07: Camp Revenue $250 FY08: Camp Revenue $250 Cash Method Accrual Method

  34. Other Accruals - Liabilities • Deferred Revenue • Tuition paid in June for summer semester ending in August • Revenue is earned evenly over the entire semester • Football season tickets sold in June • This hasn’t been earned until the football season begins in September

  35. Questions ? ACCRUAL ACCOUNTING

  36. Campus services • Valerie Monahan 1-3001 • Heidi Barclay 1-4148 • Janice Inman 1-6752 • Laura Streit 1-7099 • http://busfin.colostate.edu/cs.aspx

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