Accrual Accounting What Is It? Definition: Accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term "accrual" refers to any individual entry recording revenue or expense in the absence of a cash transaction.
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Cash vs. Accrual It's important to understand the basics of the two principal methods of keeping track of a business's income and expenses: cash method and accrual method (sometimes called cash basis and accrual basis). In a nutshell, these methods differ only in the timing of when transactions, including sales and purchases, are credited or debited to your accounts. The accrual method is the more commonly used method of accounting. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.
Cash Accounting A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for). When transactions are recorded on a cash basis, they affect a company's books only once a completed exchange of cash has occurred; therefore, cash basis accounting is less accurate than accrual accounting in the short term. For example, let's say a bus construction company secures a major contract in a given year, but will only be paid for its efforts upon completion of the project. Using cash basis accounting, the company will only be able to recognize the revenue from its project at its completion, while it will record the project's expenses as they are being paid out. If the project's time span is greater than one year, the company's income statements will be misleading: the company will incur large losses one year and then great gains the next.
Accrual Accounting An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that you match revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current and true financial condition. Accrual accounting is considered to be the standard accounting practice for most companies, with the exception of very small mom and pop type operations. The need for this method arose out of the increasing complexity of business transactions and a desire for more accurate financial information. Selling on credit and projects that provide revenue streams over a long period of time affect the company's financial condition at the point of the transaction. Therefore, it makes sense that such events should also be reflected on the financial statements during the same reporting period that these transactions occur.
Accrual Accounting – cont. For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or even next year. Accrual accounting, however, says that the cash method is not accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue. This method books the sale to match to related expenses associated with that sale (wages, rent, utilities, inventory, etc.). The accrual basis of accounting will paint a truer picture of your companys financial position, but the bookkeeping is somewhat more cumbersome.
Why Do We Care? 1. PURPOSE. This circular is a re-issuance of guidance on the administration of the transit assistance program for nonurbanized areas under 49 U.S.C. 5311, and guidance for the preparation of grant applications. This revision incorporates provisions of the Safe, Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (SAFETEA–LU), and includes the most up-to-date available guidance for the program. 2. CANCELLATION. This circular cancels Federal Transit Administration (FTA) Circular 9040.1E, Nonurbanized Area Formula Program Guidance and Grant Application Instructions, dated October 1, 1998. Chapter VI, Financial Management 6.b (2) on page VI-7 Costs incurred and available balances are reported annually on an accrual basis, on the Financial Status Report in FTAs Transportation Electronic Award Management (TEAM) System.
Think of it Like… FTA Requires Accrual Accounting FTA Gives ODOT Money ODOT Passes FTA $$ to You ODOT Also Gives You State $$ ODOT Has to Report Your Data to FTA You Have to Report Data To ODOT You are Related to Kevin Bacon!
Some Common Items Wages and Fringes Fuel and Maintenance –Fuel Tax Refunds Professional Services Purchased Transportation Insurance –Insurance Recoveries
Wages Cash 2-2-07 Wage Expense $6,000 Cash $6,000 Accrual 1-28-07 Wage Expense $6,000 Wages Payable $6,000 2-2-07 Wages Payable $6,000 Cash $6,000 Employees are paid on the Friday following the end of the 2 week pay period (Sun-Sat). For the pay period 1-13-07 to 1-28/07, total wages are $6,000. Pay checks are issued on 2-2-07.
Fringes Cash 1-12-07 Life Ins Expense $2,400 Cash $2,400 Accrual 1-1-07 Life Ins Expense $200 Prepaid Insurance $200 (you make this same entry each month of the year) 1-12-07 Prepaid Insurance $2,400 Cash $2,400 Your Life Insurance vendor bills you $2,400 on 1-1-07 for your total calendar year 2007 premiums. You pay the bill on 1-12-07.
Professional Services Service Date vs. Billing Date Paying in advance Paying at the end of the contract Progress payments
Fuel & Maintenance Fuel –Buying in advance –Paying for usage the following month –How to handle state tax refunds Maintenance –Invoice date vs. repair date –Service costs vs. repair parts
Utilities Recording Donated Utilities Breaking out taxes, late fees, etc. Accounting for Deposits
Insurance What period of time does the invoice cover? How to book this How to handle checks to your agency from others for reimbursement for damages to your property(these are reductions in insurance expense, not other revenue!)
Taxes Book all Taxes Here (unless your vendor invoices do not break out taxes, in that case it is ok to include the taxes as part of the normal expense – ie Fuel purchases). Offset Refunds against Expenses (if the tax was recorded in the supply expense then you would offset that account).
Purchased Transportation Timing of Billings Deduct for Fares
Misc. Expenses Not a Dumping Spot Usually Asked to Explain
Purchased Transportation Timing of Billings Deduct for Fares
Transit Related Exercise 1 st Quarter – Class WNMM Transit –Prize for first to figure out what WNMM stands for.
Accounting Options Pencil and Paper (or Excel) –If transactions are limited. Off the Shelf Products –Quickbooks, Peachtree, Money, others. Contract Out –Find a bookkeeping service or small accounting firm to prepare monthly financial statements.
Options for Compliance Manually Convert Your Cash Data to Accrual on a Quarterly Basis. Convert to Full Accrual Accounting. Maintain Two Sets of Books if your Fiscal Agent is Cash Based.