Examples of accrual accounting in the following topics:
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- as an alternative measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities.
- can be used to evaluate the "quality" of income generated by accrual accounting.
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- Post to ledger – transfer the journal entries to ledger accounts.
- Adjusting entries – prepare and post accrued and deferred items to journals and ledger T-accounts.
- Closing entries – prepare and post closing entries to transfer the balances from temporary accounts.
- To be used as an alternative measure of a business's profits when it is believed that accrual accounting concepts do not represent economic realities.
- To evaluate the 'quality' of income generated by accrual accounting.
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- In addition to the Single and Multi-step methods, the income statement can be reported on a cash or accrual basis.
- Larger entities use the accrual basis, which is also the recommended method by the FASB.
- An income statement under accrual accounting reflects revenues "earned", where an exchange in value among the parties has taken place, regardless of whether cash was received.
- Some numbers vary based on the accounting methods used (e.g. using FIFO or LIFO accounting to measure inventory level).
- Guidelines for statements of comprehensive income and income statements of business entities are formulated by the International Accounting Standards Board and numerous country-specific organizations, for example the FASB in the U.S.
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- The accounts receivable departments use the sales ledger, which normally records:
- Companies have two methods available to them for measuring the net value of accounts receivable, which is generally computed by subtracting the balance of an allowance account from the accounts receivable account.
- The entry would consist of debiting a bad debt expense account and crediting the respective accounts receivable in the sales ledger.
- Under accrual accounting, a firm can recognize revenue when it has:
- This chart lays out methods for accruing revenue and expenses in accounting.
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- The cash flow statement has been adopted as a standard financial statement because it eliminates allocations, which might be derived from different accounting methods, such as various timeframes for depreciating fixed assets.
- These two financial statements reflect the accrual basis accounting used by firms to match revenues to the expenses associated with generating those revenues.
- As a cash flow statement is based on the cash basis of accounting, it ignores the basic accounting concept of accrual.
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- It is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account the amount at which the asset could be bought or sold in a current transaction between willing parties.
- Where the assets produce benefit in future periods, the matching principle of accrual accounting dictates that those costs must be deferred rather than treated as a current expense.
- Methods may be specified in the accounting or tax rules of a country.
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- In the US, companies must conform to GAAP, or generally accepted accounting principles.
- These principles are set forward by the FASB, or the Financial Accounting Standards Board.
- Accounting Entity: assumes that the business is separate from its owners or other businesses.
- This way of accounting is called accrual basis accounting.
- Consistency principle: the company uses the same accounting principles and methods from period to period.
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- These activities include billing customers as quickly as possible, disbursing payments only when they come due, collecting cash on overdue accounts, and investing idle cash.
- The adjusted net income method starts with operating income and adds or subtracts changes in balance sheet accounts, such as receivables, payables, and inventories to project cash flow.
- The pro-forma balance sheet method looks straight at the projected book cash account; if all the other balance sheet accounts have been correctly forecast, cash will be correct, too.
- The accrual reversal method is similar to the adjusted net income method, but instead of using projected balance sheet accounts, large accruals are reversed and cash effects are calculated based upon statistical distributions and algorithms.
- The accrual reversal method is more complicated and best suited for medium-term forecasting.
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- These differences are due to the recording requirements of GAAP for financial accounting (usually following the matching principle and allowing for accruals of revenue and expenses) and the requirements of the IRS's tax regulations for tax accounting (which are more oriented to cash).
- Such timing differences between financial accounting and tax accounting create temporary differences.
- The historical cost principle: It requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.
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- The assessment of risk is an integral part of risk management in general, and includes probability studies, impact of events, and takes into account the affect of every known risk on the project, and the actions needed to resolve these issues, should they occur.
- From the average cost per employee over time, or cost accrual ratio, a project manager can estimate: the cost associated with the risk, if it arises, estimated by multiplying employee costs per unit time by the estimated time lost (cost impact, C where C = cost accrual ratio * S), the probable increase in time associated with a risk (schedule variance due to risk, Rs where Rs = Probability * S).
- The probable increase in cost associated with a risk (cost variance due to risk, Rc where Rc = P*C = P*Cost Accrual Ratio*S = P*S*CAR): sorting on this value puts the highest risks to the budget first, which can raise concerns about schedule variance.