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Questions and Answers
Under the accruals basis of accounting, when should revenue be recognized?
Under the accruals basis of accounting, when should revenue be recognized?
- When the cash is received
- When the goods or services have been transferred to the customer (correct)
- When the invoice is sent to the customer
- When the customer pays for the goods or services
The accruals basis of accounting recognizes the impacts of transactions only when cash is received or paid.
The accruals basis of accounting recognizes the impacts of transactions only when cash is received or paid.
False (B)
What is another term used for the accruals basis of accounting?
What is another term used for the accruals basis of accounting?
matching concept
Under the accruals basis, expenses are recognized in the statement of profit or loss based on a direct association between costs incurred and the earning of specific items from ________.
Under the accruals basis, expenses are recognized in the statement of profit or loss based on a direct association between costs incurred and the earning of specific items from ________.
Which of the following statements best describes the treatment of purchase costs from suppliers on credit under the accruals basis?
Which of the following statements best describes the treatment of purchase costs from suppliers on credit under the accruals basis?
If a business makes a sale on credit, revenue is recognized in profit only when the customer makes the payment.
If a business makes a sale on credit, revenue is recognized in profit only when the customer makes the payment.
What is a key difference between the cash basis and accruals basis of accounting?
What is a key difference between the cash basis and accruals basis of accounting?
In the context of accruals accounting, what does 'matching' refer to?
In the context of accruals accounting, what does 'matching' refer to?
Under the accruals concept, revenue is recognized when it is ________, regardless of when payment is received.
Under the accruals concept, revenue is recognized when it is ________, regardless of when payment is received.
According to the accruals basis, if a company pays for an insurance policy that covers the next 12 months, the entire expense should be recognized immediately.
According to the accruals basis, if a company pays for an insurance policy that covers the next 12 months, the entire expense should be recognized immediately.
Which of the following is an example of an accrued expense?
Which of the following is an example of an accrued expense?
Prepaid expenses are considered current liabilities on the statement of financial position.
Prepaid expenses are considered current liabilities on the statement of financial position.
Accrued expenses are shown in the statement of financial position as a current ________.
Accrued expenses are shown in the statement of financial position as a current ________.
Define prepaid expenses.
Define prepaid expenses.
A business pays its annual rent of $24,000 on April 1st each year. If the business is preparing its statement of profit or loss for the six months ending September 30th, what amount should be charged for rent expense?
A business pays its annual rent of $24,000 on April 1st each year. If the business is preparing its statement of profit or loss for the six months ending September 30th, what amount should be charged for rent expense?
If a business rents a shop and has paid the full year's rent in advance, the entire rent payment should be recorded as an expense in the month it was paid.
If a business rents a shop and has paid the full year's rent in advance, the entire rent payment should be recorded as an expense in the month it was paid.
Which accounting principle is applied when a company allocates the cost of a prepaid insurance policy over the periods it covers?
Which accounting principle is applied when a company allocates the cost of a prepaid insurance policy over the periods it covers?
What type of account is used to record expenses that have been incurred but not yet paid?
What type of account is used to record expenses that have been incurred but not yet paid?
Under accrual accounting, if a company receives cash for services to be performed next year, this would be recorded as ________ revenue.
Under accrual accounting, if a company receives cash for services to be performed next year, this would be recorded as ________ revenue.
The cash basis of accounting typically provides a more accurate long-term view of a company's financial performance compared to the accruals basis.
The cash basis of accounting typically provides a more accurate long-term view of a company's financial performance compared to the accruals basis.
What is an accrued expense?
What is an accrued expense?
What is the difference between an accrued expense and a prepaid expense?
What is the difference between an accrued expense and a prepaid expense?
Provide an example of an accrued expense
Provide an example of an accrued expense
Provide an example of a prepaid expense
Provide an example of a prepaid expense
What is the accruals basis of accounting?
What is the accruals basis of accounting?
What is the cash basis of accounting?
What is the cash basis of accounting?
What is the matching principle?
What is the matching principle?
When is revenue recognised as earned?
When is revenue recognised as earned?
If Zandra sold 25 ponies instead of the 30 she paid for in March, we should include the expense of the 30 ponies in March.
If Zandra sold 25 ponies instead of the 30 she paid for in March, we should include the expense of the 30 ponies in March.
Flashcards
Accruals Basis
Accruals Basis
Revenue is recognized when earned, and costs are recognized when incurred, matching revenues and related costs in the same period.
Accruals Basis Definition
Accruals Basis Definition
The accruals basis recognizes transactions when they occur, not when cash is received or paid.
Revenue Recognition
Revenue Recognition
Recognizing revenue in profit when it is earned, regardless of when payment is received.
Cost Recognition
Cost Recognition
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Accrued Expenses (Accruals)
Accrued Expenses (Accruals)
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Prepaid Expenses
Prepaid Expenses
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Study Notes
- Accruals basis means recognizing revenue when earned and costs when incurred, matching related costs and revenues in the same period.
Definition of Accruals Basis
- The accruals basis recognizes transactions when they occur, not when cash changes hands.
- Transactions get recorded and reported in the period they relate to.
- Expenses are recognized when there's a direct link between costs and income.
Key Consequence of Accruals Basis
- Revenue is recognized when earned, usually when goods/services are transferred.
- Costs are recognized when goods/services are received, not when the supplier is paid.
Example: Zandra Shah's Toy Pony Business
- Zandra imports toy ponies for $10 each and sells them for $15 in October 20X2.
Purchases
- Invoice date: 7.10.X2
- Delivery date: 7.10.X2
- Number: 30
- Invoiced cost: $300
- Invoice paid: 1.11.X2
Sales
- Invoice date: 8.10.X2, 12.10.X2, 23.10.X2
- Number: 6, 9, 15
- Invoice value: $90, $135, $225
- Invoice paid: 1.11.X2
Cash Basis (October)
- No sales
- No expenses
- No profit/loss
- No transactions are recognized in profit in October because all transactions are not realized in the form of cash unitl November.
Accruals Basis (October)
-
Sales: $450
-
Purchases: ($300)
-
Profit = $150
-
All transactions take place in October, and are recognized in profit in October.
Financial Position (October 31, 20X2)
-
Assets: $450
-
Trade receivables: $450
-
Capital and liabilities: $450
-
Proprietor's capital $150
-
Liabilities: Trade payables $300
-
If Zandra only sold 25 ponies out of 30, only the purchase cost of 25 ponies is matched with October Sales revenue, so profit is $125
Financial Position with unsold Ponies (October 31)
-
Assets: $425
-
Inventory (at cost, 5 x $10): $50
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Trade receivables (25 x $15): $375
-
Capital and liabilities: $425
-
Proprietor's capital (profit for the period): $125
-
Liabilities: Trade payables: $300
-
Accruals basis gives a truer picture as customers are legally bound to pay her.
Accrued Expenses (Accruals)
- Expenses that relate to an accounting period but haven't been paid yet.
- Shown as a current liability in the statement of financial position at the end of the period.
Prepaid Expenses (Prepayments)
- Expenses paid in an accounting period but relate to a future period.
- Shown as a current asset in the statement of financial position at the end of the period.
Introduction to Accruals and Prepayments
- Profit should be calculated by charging expenses related to the period.
- Charge six months' expenses for rent and local taxes, insurance costs and telephone costs, and so on.
- Expenses might not be paid during the period to which they relate.
- Correctly charging rent for the first six months of the year 20X7, requires a charge for rent in the statement of profit or loss is $10 000.
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