What is Accrual Basis Accounting?

Accrued expenses are also called expenses payable, which refer to various expenses that have occurred (consumed) but have not been paid in the current period, such as rents payable, interest payable and wages payable. The adjustment of accrued expenses should recognize expenses on the one hand, and increase liabilities on the other hand. After the expenses are confirmed, they will be transferred to the profit of the year account at checkout, and the liabilities will be written off when the next payment is made. ^[1]

Accruals

The basic purpose of the accrual principle is to make income and expenses match each other in order to calculate various profits and losses correctly. Therefore, at the end of the period, if the costs that are borne by the current period are not paid because they have not been paid, they should be accounted for.

Costs have been incurred or increased but have not been paid;

Have a definite date that must be paid;

Rise and fall with the company's operating level;

No interest on financing.

The amount of accrued expenses;

Interval for payment of accrued expenses

The larger the production and sales scale of an enterprise, the greater the amount of accrued expenses and the more naturally formed funds available; the longer the interval between the occurrence of accrued expenses and the payment, the more funds available to the enterprise The longer it takes. Calculation formula for accrued expenses financing amount:

Accrued expenses financing amount = [average amount of accrued expenses on a daily basis × (days of accrued expenses payment interval / 2)

The limitation of accrued expenses is that they are not truly discretionary financing methods.

Delays in payment of taxes are punishable;

Delayed payment of wages will affect morale and productivity of workers.

If the corporate finance officer

Suppose that Gary Lyon and Monica Lyon invested $ 50,000 to start the company and Sea Air Travel issued common stock to both of them.

The effect of the transaction on the air and sea travel company's accounting equation was an increase of $ 50,000 in cash and an increase in common stock, as shown below:

Assets = Liabilities + Owner's Equity Owner's Equity Transaction Type

Cash common stock

(1) +50000 +50000 Issuance of ordinary shares to owners

For each transaction, the net amount on the left side of the accounting equation must be equal to the net amount on the right side of the equation. This first transaction adds both assets (in this case, cash) and the company's owner's equity (common stock). This matter does not include liabilities because it does not create an obligation for Hai Hai to make payments to external parties. At the far right of the re-transaction, we wrote "Issue common stock to the owner" to explain why the owner's equity increased by 50,000. Impact of transactions on financial statements Each transaction affects financial statements. We can prepare financial statements after one, two or any number of transactions have occurred. For example, sea and air travel companies can compile their balance sheet after this first transaction, as shown below:

Sea and air travel

Balance sheet

20X1 April 1,

Assets and liabilities

Cash 50000 None

Owners' equity

Common stock 50000

Total shareholders' equity

Total assets 50,000 Total assets and equity 50,000

The balance sheet above shows that Air Travel has $ 50,000 in cash and no debt. Therefore, shareholders own the entire assets of the company. But the company's balance sheet did not reveal the names of shareholders. Their equity in assets is simply expressed as "common stock" in the balance sheet.

Haikong s first transaction only affected two balance sheet accounts, cash and common shares, and did not generate operating income or any expenses. As a result, Haikong now does not have to report income statements. In practice, most companies report their financial statements after the end of an accounting period, rather than after a transaction occurs. But with modern accounting systems, managers and owners can always get the reports they want to know what the company is like now. Let's look at the second example.