In accrual accountingyou record income when you complete a service or when goods are shipped and delivered.
Three core financial statements Video transcript Let's now account for the same series of events, but instead of doing it on a cash basis, let's do it on an accrual basis. And the whole idea with accrual accounting is to match your revenues and expenses to when you actually perform the service.
So it actually captures business activity, as opposed to just capturing when cash changes hands. So let's see what that actually means. And what I'll do, I'll do the accrual accounting right here. So this is kind of the cash income statement.
Let's do the accrual accounting income statement. So at least for month one, the cash basis and accrual basis of accounting look exactly the same. Now let's go to month two. So now it gets interesting, because you performed the catering that month.
They did not give you the cash. So this accounts receivable, this is essentially stuff that other people owe you.
You need to receive this from other people. But it's an asset. Other people have an obligation to you. So here, all of a sudden, you performed the service, the revenues and expenses for that service are in that month. So it is actually a better reflection of what you did it that month.
Now, let's go to month three. Now with cash basis, you would have added that to your revenue. But here we already accounted for it in the accounts receivable.
So you did no catering in month three, and because you did no catering in month three, you have zero revenue in month three. And then you also have zero expenses.
And that goes to cash. You've got the cash there. But we didn't earn any revenue. So we put that right over here in deferred revenue. That's revenue that we're deferring to a future period. In the future, we will earn it. This is now a liability, because we are obligated to earn that revenue.
And then in month four, we actually earn the revenue. So whether you do the cash basis or the accrual basis, you have the same exact amount of cash. But what's more interesting is how the profit relates in each of the periods.
And I'll talk about that in a little bit more depth in the next video.Let's now account for the same series of events, but instead of doing it on a cash basis, let's do it on an accrual basis.
And the whole idea with accrual accounting is to match your revenues and expenses to when you actually perform the service. Bookkeeping and Accounting All-in-One For Dummies - UK, UK Edition.
you need to estimate the cost of the telephone bill for the quarter ahead and make an accrual in the accounts. For example, you assume that based on previous usage, your next telephone bill is likely to be £ An example of a prepayment would be an invoice for.
Accrual accounting is the opposite of cash accounting, which recognizes economic events only when cash is exchanged. The accrual method is more common than the cash method, and the IRS often requires companies to use accruals when they have more than . Many small businesses use the cash method of accounting because it is the easiest way to track revenue and expenses.
The more complex accrual method requires a greater understanding of accounting principles, but reported results are usually more accurate. A prepayment is a payment made in this accounting period but which will not be used until the next accounting period.
A prepayment is the opposite of an accrual: some . Accrual accounting In accrual accounting, payments are recorded when the financial event occurs, not when the cash actually changes hands. In this system, a prepayment for an expense would be entered when the billing occurs, not when the payment is made.