2.2 – Advanced Journal Entries
2.2.1 – Accrual Journal Entries
What does 'accrual' mean?
- We already introduced the term ‘accrual’ to distinguish between two methods of accounting—accrual
accounting versus cash accounting.
- Under the cash method of accounting, transactions are recorded when cash is exchanged, whereas under
the accrual method of accounting, transactions are recorded in the accounting period to which they relate,
regardless of when cash is exchanged.
- For example, when a business sells goods to a customer on account, the business records that transaction
at the time of the sale, even though they may not receive the actual payment until 30 days later. As a
general term, any such transaction can be called an ‘accrual’.
- When Maria has maintenance performed on the studio's heating equipment, sh recognizes an expense
immediately for the services that were provided.
- Because Maria doesn't pay for the services until 30 days later, she records a liability to show its
obligation to pay.
- Notice that there was a debit to equipment maintenance expense, which decreases owner's equity,
and a credit to accounts payable, which increases the liability account.
- When cash is actually paid, Bikram Yoga will record this journal entry.
- Accounts payable, the liability created when the service was performed, decreases through a debit
because the obligation is being fulfilled.
- Cash decreases through a credit to show the outflow of cash to pay the vendor.
Journal Entries
Let's look more closely at the journal entries shown in the previous video. Note that Bikram Yoga
Natick records the first journal entry on August 1, 2013 and recognizes an expense on that date, when
the work is performed, even though cash was not yet paid. The other side of the journal entry records
the liability, known as accounts payable, since Bikram Yoga Natick is now obligated to pay for the
equipment maintenance services provided.
This study source was downloaded by 100000889502333 from CourseHero.com on 08-17-2024 13:08:51 GMT -05:00
https://www.coursehero.com/file/49064315/22-Advanced-Journal-Entriesdocx/
, Later, on August 31, 2013, when Bikram Yoga Natick pays the bill, it records the second journal entry.
Since the expense was already recognized when the work was performed, this journal entry does not
affect expenses. This transaction only represents Bikram Yoga Natick paying cash and thus eliminating
the liability it had previously incurred.
Also take note of how the accounting equation still balances after each journal entry. In the first journal
entry, equity decreased by $300 while liabilities increased by $300. In the second journal entry,
liabilities decreased by $300 while assets decreased by $300.
Q. Suppose that on March 1, 2014 Cardullo's purchased an order of German chocolate from a
supplier for $250, but didn't pay cash for the order until March 31, 2014.
How would you record this transaction at the time of the purchase?
How would you record the transaction at the time Cardullo's paid the $250 cash to the
supplier?
A. At the time of purchase, Inventory (an asset) increases with a debit of $250, and Accounts
Payable (a liability) increases with a credit of $250. At the time of payment, Accounts
Payable (a liability) decreases with a debit of $250, and Cash (an asset) decreases with a
credit of $250.
Q. On 4/1/14, Alphatestah, a software company, purchased office furniture for $24,000 on
credit. On 4/30/14, Alphatestah, a software company, makes payment for $24,000 for office
furniture that they purchased on credit.
A. At the time of purchase, Property, Plant, & Equipment or P,P&E (an asset) increases with a
debit of $24,000, and Accounts Payable (a liability) increases with a credit of $24,000.
This study source was downloaded by 100000889502333 from CourseHero.com on 08-17-2024 13:08:51 GMT -05:00
https://www.coursehero.com/file/49064315/22-Advanced-Journal-Entriesdocx/
2.2.1 – Accrual Journal Entries
What does 'accrual' mean?
- We already introduced the term ‘accrual’ to distinguish between two methods of accounting—accrual
accounting versus cash accounting.
- Under the cash method of accounting, transactions are recorded when cash is exchanged, whereas under
the accrual method of accounting, transactions are recorded in the accounting period to which they relate,
regardless of when cash is exchanged.
- For example, when a business sells goods to a customer on account, the business records that transaction
at the time of the sale, even though they may not receive the actual payment until 30 days later. As a
general term, any such transaction can be called an ‘accrual’.
- When Maria has maintenance performed on the studio's heating equipment, sh recognizes an expense
immediately for the services that were provided.
- Because Maria doesn't pay for the services until 30 days later, she records a liability to show its
obligation to pay.
- Notice that there was a debit to equipment maintenance expense, which decreases owner's equity,
and a credit to accounts payable, which increases the liability account.
- When cash is actually paid, Bikram Yoga will record this journal entry.
- Accounts payable, the liability created when the service was performed, decreases through a debit
because the obligation is being fulfilled.
- Cash decreases through a credit to show the outflow of cash to pay the vendor.
Journal Entries
Let's look more closely at the journal entries shown in the previous video. Note that Bikram Yoga
Natick records the first journal entry on August 1, 2013 and recognizes an expense on that date, when
the work is performed, even though cash was not yet paid. The other side of the journal entry records
the liability, known as accounts payable, since Bikram Yoga Natick is now obligated to pay for the
equipment maintenance services provided.
This study source was downloaded by 100000889502333 from CourseHero.com on 08-17-2024 13:08:51 GMT -05:00
https://www.coursehero.com/file/49064315/22-Advanced-Journal-Entriesdocx/
, Later, on August 31, 2013, when Bikram Yoga Natick pays the bill, it records the second journal entry.
Since the expense was already recognized when the work was performed, this journal entry does not
affect expenses. This transaction only represents Bikram Yoga Natick paying cash and thus eliminating
the liability it had previously incurred.
Also take note of how the accounting equation still balances after each journal entry. In the first journal
entry, equity decreased by $300 while liabilities increased by $300. In the second journal entry,
liabilities decreased by $300 while assets decreased by $300.
Q. Suppose that on March 1, 2014 Cardullo's purchased an order of German chocolate from a
supplier for $250, but didn't pay cash for the order until March 31, 2014.
How would you record this transaction at the time of the purchase?
How would you record the transaction at the time Cardullo's paid the $250 cash to the
supplier?
A. At the time of purchase, Inventory (an asset) increases with a debit of $250, and Accounts
Payable (a liability) increases with a credit of $250. At the time of payment, Accounts
Payable (a liability) decreases with a debit of $250, and Cash (an asset) decreases with a
credit of $250.
Q. On 4/1/14, Alphatestah, a software company, purchased office furniture for $24,000 on
credit. On 4/30/14, Alphatestah, a software company, makes payment for $24,000 for office
furniture that they purchased on credit.
A. At the time of purchase, Property, Plant, & Equipment or P,P&E (an asset) increases with a
debit of $24,000, and Accounts Payable (a liability) increases with a credit of $24,000.
This study source was downloaded by 100000889502333 from CourseHero.com on 08-17-2024 13:08:51 GMT -05:00
https://www.coursehero.com/file/49064315/22-Advanced-Journal-Entriesdocx/
