2. ACCRUAL VS. CASH BASIS
Cash
Basis
Not GAAP
approved
Records
revenues when
cah is
received
Records
expenses
when cash is
paid
Accrual
Basis
GAAP
approved
Records
revenues when
earned
Records
expenses
when incurred
3. DEFERRED VS. ACCRUED
Deferred
Revenue: cash
received
before earned
Expense: cash
paid before
incurred
Accrued
Revenue: cash
paid after
earned
Expense: cash
paid after
incurred
4. THINK ABOUT IT…
A deferred expense in 2011 means cash was
paid in 2011 but will be incurred later
(probably in 2012), therefore under accrual
basis, you’d include it in Net Income
calculation for 2012 (when it’s earned). For
cash-basis, you’d include it in Net Income
calculation for 2011 (when the cash was
paid).
An accrued expense in 2011 means cash will
be paid after it’s accrued, therefore under
accrual basis you include the expense for
2011 (since it’s incurred then), and for cash
basis, you include it in 2012 (when cash is
paid).
A deferred revenue in 2011 means the
revenue will be earned in 2012, but cash was
received in 2011 (before it’s earned). For
accrual basis will count the revenue in 2012
and cash basis will count the revenue in 2011
(when cash is received).
An accrued revenue in 2011 means the cash
was received after it was earned, so it was
earned in 2011 and cash will be received in
future (probably 2012). Accrual basis
records the revenue in 2011 (when it’s
earned) and Cash basis records the revenue
in 2012 (when cash is received).
5. DEFERRED REVENUE EXAMPLE
Suppose that a company sells 12-month subscriptions
to its monthly magazine. On October 1, the company
receives a total of $1,200 for 20 subscriptions.
6. ACCRUED REVENUE EXAMPLE
Assume a CPA firm agrees to provide a service to a client
for a $1,000 fee. The firm completes its work on Sep. 23,
bills the client on October 10, and receives payment on
October 21. The CPA firm closes its own books on Sep. 30.
7. DEFERRED EXPENSE EXAMPLE
Suppose that on March 1, a company purchases a 12-
month general liability insurance policy for $36,000.
8. DEFFERRED EXPENSE EXAMPLE CONT.
Suppose further that the company prepares
financial statements at the end of March. As of
March 31, the company has been covered for one
month and has therefore consumed one month of
insurance, or $3,000 ($36,000 ÷ 12 months).
9. ACCURED EXPENSE
Suppose that a company’s daily payroll is $1,000. The
company pays its employees via direct deposit every
Saturday for the work the employees have provided
through Friday. Suppose further that the company
prepares its financial statements on April 30, which is a
Friday.
11. CLOSING PROCESS
• The closing process is the process of transferring all
revenue, expense, and dividend account balances to
the Retained Earnings account.
• Each revenue account is reduced to zero by debiting
it and each expense account is reduced to zero by
crediting it.
• The offset account- Retained Earnings- is credited for
the amount of total revenues and debited for the
amount of total expenses.
• Thus, the balance of ending Retained Earnings
account for a period shows the difference between
total revenues and total expenses.
18. SWEET CHEEKS FACIAL SPA
ADJUSTED TRIAL BALANCE
SEPTEMBER 30
Debit Credit
Cash $ 4,300
Accounts Receivable 500
Supplies 500
Equipment 18,000
Accumulated Depreciation $ 2,550
Interest Payable 50
Notes Payable 10,000
Common Stock 10,000
Service Revenue 6,000
Advertising Expense 650
Depreciation Expense 1,350
Interest Expense 450
Salaries Expense 600
Supplies Expense 1,750
Dividends 500 —
$28,600 $28,600
Teaching Tip: Adjusting entries are made to record revenues that have been earned but not
recorded and expenses that have been incurred but not recorded. The types include deferred
revenue and expenses and accrued revenue and expenses. The adjusted trial balance will
bal. = $1,750 used.
