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© Major Training Services Pty Ltd
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
5© Major Training Services Pty Ltd
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.
© Major Training Services Pty Ltd
THE END
Thank you
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