ACCRUAL CONCEPT

1
ACCRUAL CONCEPT
LG 1

• Transactions
• Are recorded as they occur
• Are recorded even if cash not received or paid
• Affect accounting equation (A L E)

2
ACCRUAL MEANS
LG 1

• Revenue recognized (recorded) when earned
• Liabilities recognized when obligation incurred
• Expenses recorded when incurred matched with
  revenue or period.

3
ACCRUAL CONCEPT
LG 1

• Accrual accounting requires both
• a. Accruals
• b. Defferals

4
MATCHING PRINCIPLE
LG 1

• Expenses recognized, recorded in same period as
  related revenue
• Matching revenue and expense to proper period
  such as Nov. rent to the month of Nov.

5
Deferrals
LG 2

• Cash flows before event.
• Deferred Revenue
• Cash received before revenue is earned.
• Deferred Expense
• Cash Paid before expense incurred.

6
Deferral Transactions
LG 2

• Deferred Expenses
• 1. Insurance
• 2. Equipment
• Deferred Revenue
• Rent from renting land.

7
Deferral TransactionsExp. - Insurance
LG 2

• Nov. 1st paid 2,400 for 2yrs (24 mons.) Ins.
  Which is 100 per month (2,400 / 24)
• Assets
  L E
• Cash Prepd. Ins.
  RE
• Nov 1. -2,400 2,400
• Nov 30th
• Adj. -100
  -100 Exp.
• Bal 11/31 2,300
  -100

8
Deferral TransactionsExp. - Equipment
LG 2

• Nov. Purchased 8,500 for equipment that will
  last several years. Amount expensed per Month
  160.
• Assets
  L E
• Cash Equip. AD N/P
  RE
• Nov 1. -1,700 8,500 6,800
• Nov 30th
  depreciation
• Adj. -160
  -160 Exp.
• Bal 11/31 8.500 2,300
  -160

9
Accruals
LG 2

• Cash flows after event.
• Accrued Revenue
• Cash received after revenue is earned.
• Accrued Expense
• Cash Paid after expense incurred.

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Accruals Transactions
LG 2

• Accrued Expenses
• 1. Wages owed
• Accrued Revenue
• Fees earned but not received from customer.

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Accrual TransactionsExp. - Wages
LG 2

• Nov. 30th employees had earned 220 of unpaid,
  unrecorded wages.
• Assets Liab E
• Wages Pay.
  RE
• Nov 30 220
  -220 Wage Exp.
• Note this is recorded as an adjustment.

12
Accrual TransactionsRevenue
LG 2

• Fees earned but not yet paid by customers.
• Assets L E
• A/R
  RE
• Nov. Billed 6,000 6,000
  Earned Rev.
• Nov 30th earned but yet billed.
• Adj. 750
  750 Exp.

13
PERIOD END ADJUSTMENTS
LG 6

• 1. Assets partly used should be expensed.
• Prepaid insurance expired 1,100
• Supplies used 150.
• Depre. Of fixed assets Equipment 160.
• Identify, analyze, record adjustment data

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PERIOD END ADJUSTMENTS
LG 6

• 2. Liab - unearned revenue that has been earned.
• 360

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PERIOD END ADJUSTMENTSAccruals
LG 6

• 1. Accrued revenue.
• Earned but not billed 750
• 2.Accrued Expenses Incurred but not recorded
• Wages earned but not recorded 220.

16
IFSF Prepaid Insurance (AJE 1)
LG 3
Cash Flows
Income Statement
Balance Sheet
Family Health Care, PC recognized insurance used
up.
Ins Exp - 1,100
17
IFSF Supplies (AJE 2)
LG 3
Cash Flows
Income Statement
Balance Sheet
Family Health Care, PC recognized supplies used
up.
Supp Exp - 150
18
IFSF Depreciation (AJE 3)
LG 3
Cash Flows
Income Statement
Balance Sheet
Family Health Care, PC recognized depreciation on
equipment.
Dep Exp - 160
19
IFSF Unearned Rent (AJE 4)
LG 3
Cash Flows
Income Statement
Balance Sheet
Family Health Care, PC recognized rent revenue.
Rent Rev 360
20
ACCRUALS
LG 3

• Recognize expense before cash is paid or
  recognize revenue before cash is received
  Examples
• Accrued expenses (interest expense)
• Accrued revenues (for services provided but not
  billed)

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FAMILY HEALTH CARE, PCAccruals
LG 3

• Accrued expense
• Wages owed but not paid, 220
• Accrued revenues
• Services provided, not billed, 750

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IFSF Wages Expense (AJE 5)
LG 3
Cash Flows
Income Statement
Balance Sheet
Family Health Care, PC incurred wages expense.
Wages exp - 220
23
IFSF Fees Earned (AJE 6)
LG 3
Cash Flows
Income Statement
Balance Sheet
Family Health Care, PC earned revenue.
Fees earned 750
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LG 2
EXERCISE 3-6a
Indicate whether the following are deferred
(prepaid) expense.
Click the button to skip this exercise

• Utilities owed, not paid
• 2-yr premium paid on insurance
• Subscriptions received in advance

• Fees earned, not received
• Tax owed, not paid
• Salary owed, not paid
• Supplies on hand
• Fees received, not earned

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LG 3
EXERCISE 3-6b
Indicate whether the following are deferred
(unearned) revenue.
Click the button to skip this exercise

• Utilities owed, not paid
• 2-yr premium paid on insurance
• Subscriptions received in advance

• Fees earned, not received
• Tax owed, not paid
• Salary owed, not paid
• Supplies on hand
• Fees received, not earned

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LG 3
EXERCISE 3-6c
Indicate whether the following are accrued
expense (liability).
Click the button to skip this exercise

• Utilities owed, not paid
• 2-yr premium paid on insurance
• Subscriptions received in advance

• Fees earned, not received
• Tax owed, not paid
• Salary owed, not paid
• Supplies on hand
• Fees received, not earned

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LG 3
EXERCISE 3-6d
Indicate whether the following are accrued
revenue (asset).
Click the button to skip this exercise

• Utilities owed, not paid
• 2-yr premium paid on insurance
• Subscriptions received in advance

• Fees earned, not received
• Tax owed, not paid
• Salary owed, not paid
• Supplies on hand
• Fees received, not earned

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LEARNING GOALS
7
Describe, illustrate common sized financial
statements.
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COMMON SIZED STATEMENTS
LG 7

• Useful in comparing one company to another
• Use vertical analysis as basis for comparison

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WENDY VS. McDONALDSCommon Size Income Statement
LG 7
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WENDY VS. McDONALDSCommon Size Income Statement
LG 7
32
ANALYSIS
LG 7

• Wendys has higher cost of
• operating restaurants
• General operating expenses
• Wendys earns significantly less (5.9) profit on
  every dollar of sales than McDonalds (12.2)

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WENDY VS. McDONALDSCommon Size Balance Sheet 2
LG 7
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ANALYSIS
LG 7
McDonalds has higher long term liabilities than
Wendys Wendys uses slightly higher equity
financing than McDonalds
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WENDYS Common Size Income Statement2005 vs.
2003
LG 7
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ANALYSIS
LG 7
Cost of food and operating restaurants has gone
up 68.9 vs. 71.0. In 2005 they had spent more
on other operating expenses than 2003 - 17.8 vs
19.0
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ANALYSIS
LG 7
Dollar cost of increasing the Cost of food and
operating restaurants from 68.9 to 71.0. s
2.1 (71.0 68.9) 05 revenue 3,783.1 M X 2.1
79.4 million