Describe Accrual Accounting and give three business transactions impacting revenue or expense but not cash. Also...
Describe Accrual Accounting and give three business transactions impacting revenue or expense but not cash. Also explain the matching concept and give three business transactions and describe how it demonstrates the matching concept. Lastly, explain what the general journal and general ledgers are and give an example of two general journal entries and how it would be posted to the general ledger.
Homework Answers
- Accrual method refers to a method in accounting where incomes or expenses are recorded when the transaction occurs rather than when the payment is paid or received. Following are the common business transactions that impacts revenue or expense but not cash;
- A mobile phone bill was received by an entity in February for a purchase made in November of previous year. This transaction will certainly constitute an accrual expense.
- Due to inadequate profits, a company could not pay its office rent in the current year. It proposes to pay it in the next year. This would constitute an accrual expense.
- A financial institution has issued a loan to an investor against an annual interest payment of 7% of the loan amount issued. During the current year, the institution did not receive any interest installment. This transaction will constitute an accrued income.
- The matching concept is an accounting practice that states that earnings are to be matched with expenses that helped in earning those revenues. According to this principle, the entity must recognize revenues and their related expenses in the same accounting period. Following are the business transactions that accurately reflects the matching concept:
- Depreciation: Depreciation is the expensing of a physical asset over its estimated useful life. While purchasing a capital asset, the complete cost cannot be shown as cost altogether in a particular year since a capital asset is of a long time nature and expense made would incur future benefits for a long period of time. Therefore, in order to keep in line with the matching period, a fraction of the total cost spent initially to purchase the capital asset is shown as an expense every year in the income statement in the name of Depreciation.
- Credit sale: When a company sells its stock on credit, the closing stock of inventory will get reduced. However, the cash has not generated at present, but there is a guarantee that the payment will be made in the future since it is an economic transaction. Therefore, according to the matching principle even though the sale value has not been realized such value will have to be treated as an income in the financial statements.
- Tax payments: Suppose a company pays its taxes once in a year. However, to be in consistent with the matching principle, the entity would reflect an amount in its half-year financial statements in the name of taxes owed on that half year's profits.
- A General journal involves basic accounting entries that will record business transactions in a sequential order by date. General journals are also called the book of original entries. Once a transaction is journalised the accountants will then post the amounts to appropriate accounts such as accounts receivables, cash account etc.
- A General ledger is a book that records all the relevant accounts such as expenses, revenues, capital, assets, liabilities etc. The amounts that are carried from the general journals are posted into general ledger accounts. After balancing the account, the individual account balances will be transferred to trial balance before appearing on a company's official financial statements.
Examples of journal entries and how it would be reflected in the ledger account;
Example 1
| Assume That A Company Depreciates Its Equipment At A Rate Of $ 50,000 Per Year. | |||||||||||||||
| In The General Journal The Company Enters The Following Information: | |||||||||||||||
| Date | Particulars | Debit (Amount $) | Credit (Amount $) | ||||||||||||
| Depreciation Expense | 50000 | ||||||||||||||
| To Depreciation Expense | 50000 | ||||||||||||||
| ( Being The Company Depreciates Its Equipment At A Rate Of $50,000 Per Year) | |||||||||||||||
| Next, The Amounts In The General Journal Must Be Posted To The Specified Accounts In The General Ledger | |||||||||||||||
| In Our Example, The Account Depreciation Expense Will Be Debited For $50,000 And The Account Accumulated Depreciation Will Be Credited For $50,000. | |||||||||||||||
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