Cash vs Accrual Accounting Cash basis accounting revenue and expenses are recorded when cash changes hands Accrual basis accounting US GAAP Revenue is recorded when earned and expenses are recorded when incurred That means that if you sell something on account you would record a journal entry at the time the sale took place Debit Accounts Receivable Credit Sales If you use the cash basis of accounting No entry would be made So when you collect the cash (another economic event) you would Debit Cash Credit Accounts Receivable PREPAIDS They are assets Recorded on the balance sheet The prepaid is set up when you pay for something inadvance It is expensed over time as the benefit is beingconsumed or the expense is being incurred Common Examples are prepaid insurance and prepaidrent RECORDED When purchased Debit Prepaid Insurance Credit Cash When incurred Debit Insurance Expense Credit Prepaid Insurance Example you buy an insurance policy on June 1 2018 for 24 months at a cost of $24,000 Record the entry to buy the insurance and then record the entry on December 31, 2018 June 1, 2018 Debit Prepaid Insurance 24,000 Credit Cash 24,000 December 31, 2018 Debit Insurance Expense 6,000 Credit Prepaid Insurance 6,000 Why is the answer $6,000 Hint look at the dates UNEARNED REVENUE It happens when you receive money in advance forservices or product delivery that is not yet performed You have not earned it yet It is a liability and recorded on the balance sheet Entry when money is received Debit Cash Credit Unearned Revenue Entry when services are performed Debit Unearned Revenue Credit Revenue Example you have a business that designs web pages for companies You receive $ 10,000 in advance on January 15, 2018 to design a web page The customer expects that you will completed with the web page on March 15, 2018 Make the entries Entry when money is received January 15,2018 Debit Cash 10,000 Credit Unearned Revenue 10,000 Entry when services are performed March 15,20180 Debit Unearned Revenue 10,000 Credit Revenue 10,000 YOUR TASK Determine the sales and net income under cash basis and accrual basis accounting using the following information January 1 2018 You open a bank account to start your new company that makes web design pages in the amount of $50,000 On January 2, 2018 you buy a computer in cash for$2,000 On January 5, 2018 you buy a printer and cell phone on credit for $100 and $1,500 respectively The terms are net 90 days January 5, 2018 you rent a small location at a web convention site for 3 months to demonstrate your business You will start these demonstrations in June 2018

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Cash vs Accrual Accounting: Cash basis accounting-revenue and expenses are recorded when cash changes hands. Accrual basis accounting US GAAP Revenue is recorded when earned

Cash vs Accrual Accounting:

Cash basis accounting-revenue and expenses are recorded when cash changes hands.

Accrual basis accounting US GAAP

Revenue is recorded when earned and expenses are recorded when incurred.

That means that if you sell something on account you would record a journal entry at the time the sale took place.

Debit Accounts Receivable

Credit Sales

If you use the cash basis of accounting No entry would be made.

So when you collect the cash (another economic event) you would

Debit Cash

Credit Accounts Receivable

PREPAIDS:

They are assets
Recorded on the balance sheet
The prepaid is set up when you pay for something inadvance.
It is expensed over time as the benefit is beingconsumed or the expense is being incurred.
Common Examples are prepaid insurance and prepaidrent.

RECORDED:

When purchased:

Debit Prepaid Insurance

Credit Cash

When incurred:

Debit Insurance Expense

Credit Prepaid Insurance

Example you buy an insurance policy on June 1 2018 for 24 months at a cost of $24,000

Record the entry to buy the insurance and then record the entry on December 31, 2018.

June 1, 2018

Debit Prepaid Insurance 24,000

Credit Cash 24,000

December 31, 2018

Debit Insurance Expense 6,000

Credit Prepaid Insurance 6,000

Why is the answer $6,000? Hint: look at the dates.

UNEARNED REVENUE:

It happens when you receive money in advance forservices or product delivery that is not yet performed.
You have not earned it yet.
It is a liability and recorded on the balance sheet

Entry when money is received:

Debit Cash

Credit Unearned Revenue

Entry when services are performed:

Debit Unearned Revenue

Credit Revenue

Example you have a business that designs web pages for companies. You receive $ 10,000 in advance on January 15, 2018 to design a web page. The customer expects that you will completed with the web page on March 15, 2018

Make the entries:

Entry when money is received: January 15,2018

Debit Cash 10,000

Credit Unearned Revenue 10,000

Entry when services are performed: March 15,20180

Debit Unearned Revenue 10,000

Credit Revenue 10,000

YOUR TASK:

Determine the sales and net income under cash basis and accrual basis accounting using the following information:
January 1 2018 You open a bank account to start your new company that makes web design pages in the amount of $50,000
On January 2, 2018 you buy a computer in cash for$2,000
On January 5, 2018 you buy a printer and cell phone on credit for $100 and $1,500 respectively. The terms are net 90 days.
January 5, 2018 you rent a small location at a web convention site for 3 months to demonstrate your business. You will start these demonstrations in June 2018.