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Wednesday, September 8, 2010

Accrual Basis Accounting for Oracle Apps Beginers

Introduction:

Accrual Basis Accounting is a system of accounting that matches revenues and expenses, respectively, to the period they were earned and incurred

With the accrual method, you record income when the sale occurs, whether it is the delivery of a product or the rendering of a service on your part, regardless of when you get paid.
On the other hand, you record an expense when you receive goods or services, even though you may not pay for them until later.

The accrual method gives you a more accurate picture of your financial situation than the cash method. This is because you record income on the books when it is truly earned, and you record expenses when they are incurred. Income earned in one period is accurately matched against the expenses that correspond to that period, so you get a better picture of your net profits for each period.

Revenue recognition: Revenue is recognized when both of the following conditions are met,
  • Ø      Revenue is earned.
  • Ø      Revenue is realized or realizable.


Revenue is earned when products are delivered or services are provided. Realized means cash is received. Realizable means it is reasonable to expect that cash will be received in the future.

Expense recognition: Expense is recognized in the period in which related revenue is recognized

Timing differences in recognizing revenues and expenses:

Four types of timing differences
1.       Accrued Revenue:   Revenue is recognized before cash is received.
2.       Accrued Expense:   Expense is recognized before cash is paid.
3.       Deferred Revenue:  Revenue is recognized after cash is received.
4.       Deferred Expense:  Expense is recognized after cash is paid.

Accrued Revenue Example:
Example: Products are sold at $5,000 on May 1, 2010 and cash is received on May 10, 2010.

Date

1-May-10
Revenue is recognized.
10-May-10
Cash is received.


Date
Account
Credit
Debit
1-May-10
Accounts receivable

5000
1-May-10
Sales
5000

10-May-10
CASH

5000
10-May-10
Accounts receivable
5000



Accrued Expense Example: On May 1, 2010, Company A borrowed $100,000 from a bank and promised to pay 12% interest at the end of each quarter.


Date

31-May-10
Interest expense is recognized for May.
30-Jun-10
Cash is paid at the end of the quarter.

Date
Account
Credit
Debit
1-May-10
CASH

100,000
1-May-10
Borrowings From Bank
100,000

31-May-10
Interest expense
1000

31-May-10
Interest Payable

1000
30-Jun-10
Interest expense
1000

30-Jun-10
Interest Payable

1000
30-Jun-10
Interest Payable
2000

30-Jun-10
CASH

2000


Deferred Revenue Example: On May 1, 2010, Company A had a new lease contract with a tenant and received $6,000 for two month rent.


Date

1-May-10
Cash is received.
May 31 and June 30 2010
Revenue is recognized at the end of May and June

Date
Account
Credit
Debit
1-May-10
CASH
6000

1-May-10
Unearned rent revenue

6000
31-May-10
Unearned rent revenue

3000
31-May-10
rent revenue
3000

6/31/2010
Unearned rent revenue

3000
6/31/2010
rent revenue
3000


Deferred Expense Example: Company A purchased an insurance for a period from May 1, 2010 to July 31, 2010 and paid $6,000 cash for three month insurance premium


Date

1-May-10
Cash is paid.
May 31, June 30, July 31, 2010
Expense is recognized at the end of May, June and July.


Date
Account
Credit
Debit
1-May-10
Prepaid Insurance
6000

1-May-10
CASH

6000
31-May-10
Insurance Expense
2000

31-May-10
Prepaid Insurance

2000
30-Jun-10
Insurance Expense
2000

30-Jun-10
Prepaid Insurance

2000
31-Jul-10
Insurance Expense
2000

31-Jul-10
Prepaid Insurance

2000


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The ideas, thoughts and concepts expressed here are my own. They, in no way reflect those of my employer or any other organization/client that I am associated. The articles presented doesn't imply to any particular organization or client and are meant only for knowledge Sharing purpose. The articles can't be reproduced or copied without the Owner's knowledge or permission.