CASH vs. ACCRUAL BASIS OF ACCOUNTING

1. CASH vs. ACCRUAL BASIS OF ACCOUNTING Maggie Whitlow 855-2822 mwhitlow@indiana.edu

2. CASH BASIS • MODIFIED CASH BASIS • ACCRUAL BASIS Maggie Whitlow

3. WHY • GAAP – Generally Accepted Accounting Principles • Recognize Income when earned • Match expenses and revenues is proper period • TELL A MORE COMPLETE STORY Maggie Whitlow

4. WHERE • INCOME STATEMENT • RECOGNIZE INCOME WHEN EARNED • RECOGNIZE EXPENSE WHEN INCURRED • BALANCE SHEET • RECEIVABLES PREPAID EXPENSE • PAYABLES ACCRUED PAYROLL • DEFERRED INCOME • DEPRECIATION Maggie Whitlow

5. HOW • CAMPUS BUS $800,000 bus passes sold Aug. 31 Bursar has transferred the cash Service will be performed over 8 months – Sept. thru April. Assume nothing else happened in August. Maggie Whitlow

6. CASH BASIS Income Statement Revenue $800,000 Expenses $ 0 Net Income $800,000 Maggie Whitlow

7. BALANCE SHEET ASSETS CASH $800,000 LIABILITIES AND FUND BALANCE FUND BALANCE $800,000 Maggie Whitlow

8. ACCRUAL BASIS The cash received on August 31 is not yet really revenue. Campus Bus has not yet performed the service, it begins on Sept. 1 The cash received should be recorded as Deferred Revenue. There will be no entry that effects the income statement for that month. Maggie Whitlow

9. BALANCE SHEET ASSETS CASH $800,000 LIABILITIES AND FUND BALANCE DEFERRED REVENUE $800,000 Maggie Whitlow

10. SEPTEMBER Earned Income: $100,000 Payroll Expenses: $40,000 Payroll Paid: $10,000 Fuel purchased $20,000 Fuel paid for $7,000 Service Maint contract paid for year $60,000 Maggie Whitlow

11. OTHER ITEMS TO CONSIDER ACCOUNTS RECIEVABLE SERVICE PERFORMED, NOT YET PAID NEED TO ESTIMATE BAD DEBT EXP DEPRECIATION FIXED ASSET COST ON BALANCE SHEET PERIODICALLY RECOGNIZE DEPR. LONG TERM DEBT BOND PRINCIPLE ON BALANCE SHEET INTEREST EXPENSE ON INCOME STATEMENT INVENTORY COST OF GOODS SOLD NEED TO ESTIMATE INVENTORY SHRINKAGE NEED TO TAKE PHYSICAL INVENTORY AT LEAST ANNUALLY Maggie Whitlow