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Accrual AccountingFundamentals

A PrimerTo assist in maintaining the knowledge and skills

after training.

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Outline of program

Introduction to Accrual AccountingTerminology - Definitions

Key Financial Reports

Accrual Accounting Versus CashAccounting

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Basic terminology

Accrual accounting breaks all transactionsdown into the following groups:

1. Assets2. Liabilities3. Equity4. Revenue5. Expense

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Asset

An item of value controlled by an organisation(e.g. buildings, computers)

An example of an asset:

Accounts Receivable

External parties from whom amounts areowed (to the organisation), for thesupply of goods or services

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Liability

An amount owed by an organisation to anexternal party (e.g. loan)

Accounts Payable

External parties to whomamounts are owed (by thereporting organisation), for thesupply of goods and services

An example of a liability:

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Current v non current assets

Assets not expected to beconverted into cash or completelyconsumed within twelve months

Current assetsCash and other assets that would beconsumed or converted into cash withintwelve months

Non-current assets

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Current v non current liabilities

Current liabilities

Liabilities which would be due andpayable within twelve months

Liabilities which are not due and payable withintwelve months

Non-current liabilities

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Equity

The net worth of an organisation

Assets – Liabilities = Equity

What of value we control less what we oweIs the equity!!

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Revenue

• Think of revenues as things we do that make useconomically better off

• Remember though revenue is not cash!!

• Revenue is is doing the work not being paid for it

• Revenue often results in the creation of an assetcalled accounts receivable

The inflow of resources into an organisation (e.g.appropriation - based on outputs) that results inan increase in assets or a decrease in liabilities

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Expense

A cost or outflow of resources from anorganisation (e.g. electricity, salaries) thatresults in a reduction in assets or anincrease in liabilities cost or expense is not buying something of

value it is consuming something of value Buying a Mars Bar is not an expense eating

the Mars Bar is the expense!!

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Prepayments

The payment of an expense in advance. As wehave paid for an expense we have not yet

incurred we have a store of value. So aprepayment is considered to be an asset.

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Accrued expenses

An accrued expense is an expense which youknow has occurred but has not been paid foror invoiced.

An example might be electricity. At the end of themonth we know we have incurred a cost for the use ofelectricity but may not have a bill. To ignore it woulddistort our costs in examining our performance for themonth so we can accrue the cost by making anestimate of the cost of electricity (something we canprobably do quite accurately) for the month.

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Key financial reports

There are three key financial statements:

The Income Statement Balance Sheet Statement of Cash Flows

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Statement of Cash Flows

The report which shows the in flows andoutflows of cash for a reporting period.

In other words where did we get cash from(being paid for services provided) andwhat did we do with it (what did we payfor: buildings, labour etc)

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Income Statement

A financial report showing the revenue,expense and operating result ( the differencebetween revenue & expense for the period) of an

organisation for a specified period

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Balance Sheet

A statement of assets, liabilities andequity for an organisation at a particularpoint in time

A statement of what we have (control)what we owe and what's left over

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The three key accrual reports

Receipts

Cash rec’d from Gov’t

Cash rec’d from others

Payments

Cash paid for rent

Cash paid for labour

Cash paid for goods etc.

Cash paid for equipment

Cash increase in Jul

Cash at start of Jul

Cash at end of Jul

Statement of Cash Flows for July

150,000

-

150,000

30,000

80,000

20,000

18,000

148,000

2,000

50,000

52,000

Revenues

Earned from Gov’t

Earned from other clients

Expenses

Rent cost

Labour cost

Goods and service cost

Equipment cost (ie. dep’n)

Operating result

Net assets at start of Jul

Net assets at end of Jul

for July

150,000

5,000

155,000

30,000

82,000

60,000

500

172,500

(17,500)

50,000

32,500

Balance Sheet end of June and July

Assets

Cash

Equipment

Receivables

Liabilities

Payables

Owed to labour

Net assets

Equity

52,000

17,500

5,000

74,500

40,000

2,000

42,000

32,500

32,500

50,000

-

-

50,000

-

-

-

50,000

50,000

Jun Jul

Income Statement

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Accrual vs cash accounting

Only records transactions when the cashmoves in or out

Cash accounting

Records transactions when they happen i.e.Revenue when it is earned and expenses whenthey are incurred, not when the cash is receivedor paid

Accrual accounting

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Accrual accounting

• Cash Outflows on non-current assetacquisitions are recorded as assets, NOTexpenses

• Cash Inflows from loans are recorded asliabilities, NOT revenue

• Takes account of non-cash expenses suchas Depreciation and Long Service Leave

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Expense recognition

• Depreciation (the using up of the value of theasset over its estimated useful life)

• Long Service Leave

Non-cash expenses

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Expense recognition

For reporting purposes, expenses shouldbe recognised in the period in which theyare incurred, not when they are paid.

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Expense recognition

Send PurchaseOrder toSupplier

Receivegoods

Pay supplier

25 Ma

y

20 June

1 Aug

ust

30 June

Accrual Accountingrecognises the expense here

Cash Accountingrecognises theexpense here

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Revenue recognition

Revenues should berecognised in theperiod in which theyare earned, not whenthey are received

Revenue recognition principle

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Summary of accrual & cash

Revenue

Accrual CashWhen goodsand servicesare provided.

When cash isreceived.

Expenses When goodsand servicesare consumed.

When cash ispaid.

Assets & Liabilities Reports allassets andliabilities.

Reports oncash.

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THE END

Thank you