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U.S. GAAP Codification IFRS International Standards Accounting Topics


Accrual Basis vs. Cash Basis Accounting


U.S. GAAP CodificationAccounting Standards ASC,  
International Financial Reporting Standards (IFRS)
U.S. GAAP by TopicAccounting by Topic



Accrual Basis Accounting
 

Under the accrual basis accounting, revenues and expenses are recognized as follows:

Revenue recognition: Revenue is recognized when both of the following conditions are met:
    a. Revenue is earned.
    b. Revenue is realized or realizable.

Revenue is earned when products are delivered or services are provided.
Realized means cash is received.
Realizable means it is reasonable to expect that cash will be received in the future.

Expense recognition: Expense is recognized in the period in which related revenue is recognized (Matching Principle).

 
Cash Basis Accounting
 

Under the cash basis accounting, revenues and expenses are recognized as follows:
    Revenue recognition: Revenue is recognized when cash is received.
   Expense recognition: Expense is recognized when cash is paid.

 
Timing differences in recognizing revenues and expenses
 

There are potential timing differences in recognizing revenues and expenses between accrual basis and cash basis accounting.

Four types of timing differences

    a.  Accrued Revenue
: Revenue is recognized before cash is received.
    b.  Accrued Expense: Expense is recognized before cash is paid.
    c.  Deferred Revenue: Revenue is recognized after cash is received.
    d.  Deferred Expense: Expense is recognized after cash is paid.



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An Example of Accrued Revenue
 
 Example: Products are sold at $5,000 on May 1, 2010 and cash is received on May 10, 2010.
 

May 1, 2010

May 10, 2010

 

Revenue is recognized.

Cash is received.

[Journal entry on May 1, 2010]

Debit

Credit

Accounts receivable

5,000

Sales

5,000

[Journal entry on May 10, 2010]

Debit

Credit

Cash

5,000

Accounts receivable

5,000

 
 
An Example of Accrued Expense
 
 Example: On May 1, 2010, Company A borrowed $100,000 from a bank and promised to pay 12% interest at the end of each quarter.
 

May 31, 2010

June 30, 2010

 

Interest expense is recognized for May.

Cash is paid at the end of the quarter.

[Journal entry on May 1, 2010]

Debit

Credit

Cash

100,000

Borrowings from bank

100,000

[Journal entry on May 31, 2010]

Debit

Credit

Interest expense

1,000

Interest payable

1,000

$100,000 x 12% x 1/12 = $1,000 for each month.

Interest payable is a liability account.
Credit side of interest payable (a liability account) represents an increase.

[Journal entry on June 30, 2010]

Debit

Credit

Interest expense

1,000

Interest payable

1,000

Credit side of interest payable (a liability account) represents an increase.

Debit

Credit

Interest payable

2,000

Cash

2,000

Company pays $2,000 as interests for May and June.
Debit side of interest payable (a liability account) represents a decrease.

 

 






An Example of Deferred Revenue
 
 Example: On May 1, 2010, Company A had a new lease contract with a tenant and received $6,000 for two month rent.
 

May 1, 2010

May 31 and June 30 2010

 

Cash is received.

Revenue is recognized at the end of May and June.

Revenue is recognized when Company A provides service. In this example, service is provided when time passes.

[Journal entry on May 1, 2010]

Debit

Credit

Cash

3,000

Unearned rent revenue

3,000

Unearned rent revenue is a liability account.
Credit side of unearned rent revenue (a liability account) represents an increase.

"Unearned revenue" accounts represent the amount of cash received before services are provided. Since services have not been provided yet, it is not revenue.

"Unearned revenue" accounts are liabilities of the company, because they should be paid back to the other party if service is not provided in the future.

[Journal entry on May 31, 2010]

Debit

Credit

Unearned rent revenue

3,000

Rent revenue

3,000

Debit side of unearned rent revenue (a liability account) represents a decrease.
Credit side of rent revenue (a revenue account) represents an increase.

[Journal entry on June 30, 2010]

Debit

Credit

Unearned rent revenue

3,000

Rent revenue

3,000

Debit side of unearned rent revenue (a liability account) represents a decrease.
Credit side of rent revenue (a revenue account) represents an increase.

 
An Example of Deferred Expense
 
 Example: Company A purchased an insurance for a period from May 1, 2010 to July 31, 2010 and paid $6,000 cash for three month insurance premium.
 

May 1, 2010

May 31, June 30, July 31, 2010

 

Cash is paid.

Expense is recognized at the end of May, June and July.

[Journal entry on May 1, 2010]

Debit

Credit

Prepaid insurance

6,000

Cash

6,000

Prepaid insurance is an asset account.
Debit side of prepaid insurance (an asset account) represents an increase.

[Journal entry on May 31, 2010]

Debit

Credit

Insurance expense

2,000

Prepaid insurance

2,000

Credit side of prepaid insurance (an asset account) represents a decrease.

[Journal entry on June 30, 2010]

Debit

Credit

Insurance expense

2,000

Prepaid insurance

2,000

Credit side of prepaid insurance (an asset account) represents a decrease.

[Journal entry on July 31, 2010]

Debit

Credit

Insurance expense

2,000

Prepaid insurance

2,000

Credit side of prepaid insurance (an asset account) represents a decrease.

 

U.S. GAAP by Topic
International Financial Reporting Standards (IFRS)
 
Accounting Topics
Inventory Valuation Methods
Depreciation Methods
Revenue Recognition Principle
Accrual Basis vs. Cash Basis Accounting
Basics of Journal Entries
Ratios for Financial Statement Analysis
Overview of Financial Statements


Review of Accounting Topics


Principles of Accounting:  

This section provides study guides for students in the principles of accounting courses or introduction to financial accounting courses. 

  
  
  


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Accounting for General Users:  
 
A guide to accounting for users who are interested in understanding accounting reports.  This section explains what users need to know to understand and analyze accounting information provided in the financial statements.  No prerequisite is required to read this section.  

  
  

    Accounting is an information system.

    Users of accounting information

    Financial accounting for external users

    Managerial accounting for internal users

    Statement of Cash Flows provides information about the cash flow of a company.

    Cash flow from operating activities

    Cash flow from investing activities

    Cash flow from financing activities



Intermediate Accounting:  

This section provides study guides for students in the intermediate accounting courses.  Following topics are discussed in this section.

  
  
 

    Depreciation Methods

    Straight Line Depreciation

    Declining Balance Method

    Sum-of-the-years-digits Method

    Accounting for Bonds Payable

    Price of bonds payable

    Discount on bonds payable

    Premium on bonds payable

    Amortization of discount and premium

    Early extinguishment of debts








Advanced Accounting:  

This section provides study guides for students in the advanced accounting courses.  Following topics are discussed in this section. 

  
  


U.S. GAAP by Codification Topic
  
 105  GAAP Hierarchy 
 105  GAAP History 

 205  Presentation of Financial Statements 
 205-20 Discontinued Operations 
 210  Balance Sheet 
 210-20 Offsetting 
 220  Comprehensive Income 
 225  Income Statement 
 225-20 Extraordinary and Unusual Items 
 230  Statement of Cash Flows 
 250  Accounting Changes and Error Corrections 
 260  Earnings per Share 
 270  Interim Reporting
 
 310  Impairment of a Loan
 320  Investment Securities 
 320  Other-Than-Temporary Impairments, FSP FAS 115-2 
 320-10-05 Overview of Investments in Other Entities 
 320-10-35 Reclassification of Investments in Securities
 323-10 Equity Method Investments
 323-30 Investments in Partnerships and Joint Ventures 
 325-20 Cost Method Investments 
 330  Inventory

 340-20 Capitalized Advertising Costs 
 350-20 Goodwill 
 350-30 Intangibles Other than Goodwill 
 350-40 Internal-Use Software 
 350-50 Website Development Costs 
 360  Property, Plant and Equipment
 360-20 Real Estate Sales 
 
 410  Asset Retirement and Environmental Obligations 
 420  Exit or Disposal Cost Obligations 
 450  Contingencies 
 450-20 Loss Contingencies 
 450-30 Gain Contingencies
 480  Redeemable Financial Instruments 

 505-20 Stock Dividends, Stock Splits 
 505-30 Treasury Stock 

 605  SEC Staff Accounting Bulletin, Topic 13 
 605-25 Revenue Recognition - Multiple Element Arrangements 
 
 715-30 Defined Benefit Plans - Pension
 718  Share-Based Payment 
 730  Research and Development 
 730-20 Research and Development Arrangements 

 805  Business Combinations  
 810  Consolidation 
 810  Noncontrolling Interests 
 810  Consolidation of Variable Interest Entities, SFAS 167 
 
 815  Derivatives and Hedging Overview 

 820  Fair Value Measurements  
 820  Fair value when the markets are not active, FSP FAS 157-4
 825  Fair Value Option 

 830  Foreign Currency Matters 
 830-20 Foreign Currency Transactions 
 830-30 Translation of Financial Statements 
 835  Interest 
 835-20 Capitalization of Interest 
 835-30 Imputation of Interest 

 840  Leases 
 840-20 Operating Leases 
 840-30 Capital Leases 
 840-40 Sale-Leaseback Transactions
 845  Nonmonetary Transactions 

 855  Subsequent Events 
 860-20 Sale of Financial Assets, SFAS 166 
 860-50 Servicing Assets and Liabilities, SFAS 156 

 985-20 Costs of software to be sold  
 
International Financial Reporting Standards (IFRS)







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