Accrual Basis and Cash Basis of Accounting
Mohammed Moin Uddin Reza Nadim
Bangladesh University of Professionals (BUP)
Accrual Basis and Cash Basis of Accounting
• Cash basis lets businesses record income and expenses only when
cash is actually received or paid.
• Accrual accounting involves tracking revenues when they are earned
and expenses as they are incurred (When service is Performed,
Ownership is Transferred, Time is lapsed, or bill is sent) instead of
when money actually changes hands.
• GAAP accepts Accrual Basis of Accounting.
Exploring Accrual Basis and Cash Basis
• Service
I/Y Performed in 2020 and Cash Received in Accrual
Particulars 2021 Basis Cash Basis
Service Service Performed in 2020 but Cash Received in 2021 2020 2021
Accrual
Revenue
Basis = Service Revenue is recorded in the I/S in 2020
Cash
Sales BasisProduct
= Service
sold inRevenue is received
2018 but Cash recorded in the I/S in 2018
in 2019 2021 2019
Revenue
Expense Service Received in 2020 but Cash paid in 2021 2020 2021
Expense Goods Purchased in 2018 but Cash paid in 2019 2018 2019
Salary Salary of 2020 is 12,000 out of 10,000 paid to the 2020 = 12,000 2020= 10,000
Expense employee in 2020 and the rest 2,000 in 2021 2021 = 0 2021=2,000
Interest Interest from investment in 2018 is 24,000 out of 2018=24,000 2018= 20,000
Revenue which 20,000 received in 2018 and the rest 4,000 in 2019=0 2019= 4,000
2019
Problem
Hello.Com purchased 100 units of goods at 3.5 taka each during 2017. It
sold 30 units of goods at 7 taka each during the year. Calculate the
Gross profit (Sales Revenue – Cost of Goods Sold) using both Accrual
basis of accounting and Cash basis of accounting.
Solution
Under Accrual Basis of Accounting –
Gross Profit = Sales Revenue – Cost of Goods Sold
= (30X7) – (30X3.5)
= 210 – 105
= 105 Taka Profit
Under Cash Basis of Accounting –
Profit = Cash Received – Cash Paid
= (30X7) – (100X3.5) = 140 Taka Loss
Adjusting Entries
Mohammed Moin Uddin Reza Nadim
Bangladesh University of Professionals (BUP)
Adjusting Entries
Accrued
Expense
Prepaid Adjusting Unearned
Expense Entries Revenue
Accrued
Revenue
Prepaid Expense
Regular Method Exceptional Method
Payment of Advance salary Payment of Advance salary
January 1 15000. (Per month Salary 1000) 15000. (Per month Salary 1000)
Prepaid Salary…Dr. 15000 A+ Salary Expense…Dr. 15000 E+
Initial Entry
Cash ……………….Cr. 15000 Cash ……………….Cr. 15000
(Jan 1)
Adjustment Used Unused
Adjusting Entry Salary Exp….Dr 12000 E+ Prepaid Salary….Dr 3000 A+
(December 31) Prepaid Salary… Cr 12000 A- Salary Expense….Cr 3000 E-
Give Adjusting Entry on Dec 31
1. On January 1, BDT 35,000 was paid as advanced house rent and
recorded as Prepaid Rent. Monthly rent is 2500 BDT.
Rent Expense – Debit 30,000
Prepaid Rent – Credit 30,000
2. On January 1, BDT 35,000 was paid as advanced house rent and
recorded as Rent Expense. Monthly rent is 2500 BDT.
Prepaid Rent – Debit 5,000
Rent Expense – Credit 5,000
Supplies
Regular Method Exceptional Method
Purchase of supplies at 15000 Purchase of supplies at 15000
January 1 Taka Taka
Supplies…..Dr. 15000 A+ Supplies Expense…..Dr. 15000 E+
Initial Entry
Cash …….…Cr 15000 Cash …………………..…Cr 15000
(Jan 1)
Adjustment Used Unused
Adjusting Entry Supplies Expense Dr. 10000 E+ Supplies….Dr 5000 A+
(December 31) Supplies……Cr…10000 A- Supplies Expense…Cr 5000 E-
Give Adjusting Entry on Dec 31
1. Supplies purchased during the year at BDT 30,000 and recorded as
Supplies. Supplies at hand at the year end is 5,000 BDT.
Supplies Expense – Debit 25,000
Supplies – Credit 25,000
2. Supplies purchased during the year at BDT 30,000 and recorded as
Supplies Expense. Supplies at hand at the year end is 5,000 BDT.
Supplies – Debit 5,000
Supplies Expense – Credit 5,000
Unearned Revenue
Regular Method Exceptional Method
Receive of Interest Revenue in Receive of Interest Revenue in
January 1 advance 30,000 taka. (Per month advance 30,000 taka. (Per
2000 Taka) month 2000 Taka)
Cash….Dr 30000 Cash….Dr 30000
Initial Entry Unearned Int. Rev… Cr 30000 L+ Int. Rev… Cr 30000 R+
(Jan 1)
Adjustment Earned Unearned
Unearned Int. Rev. Dr.. 24000 L- Int. Rev…Dr 6000 R-
Adjusting Entry
Int. Rev….Cr….. 24000 R+ Unearned Int. Rev… Cr 6000 L+
(December 31)
Give Adjusting Journal on Dec 31
1. On January 1, Service Revenue received in advance at 50,000 Taka
and recorded as Unearned service revenue. 20,000 BDT is related to
next year.
Unearned Service Revenue – Debit 30,000
Service Revenue – Credit 30,000
2. On January 1, Service Revenue received in advance at 50,000 Taka
and recorded as Service revenue. 20,000 BDT is related to next year.
Service Revenue – Debit 20,000
Unearned Service Revenue – Credit 20,000
Accrued Expense &
Accrued Revenue
Accrued Expense Accrued Revenue
Dec 31: Accrued Salary 3000 Taka Dec 31: Accrued Interest Revenue 4000/=
Adjusting Entry (Dec 31) Adjusting Entry (Dec 31)
Salary Exp…Dr 3000 E+ Accrued Int. Rev….Dr 4000 A+
Accrued Salary…Cr 3000 L+ Int. Rev….Cr 4000 R+
Give Adjusting entry on Dec 31
1. Rent 3000 is accrued at the year end.
Rent Expense – Debit 3,000
Accrued Rent Expense – Credit 3,000
2. Commission 5000 is accrued at the year end.
Commission Expense – Debit 5,000
Accrued Commission Expense – Credit 5,000
3. Service revenue 10,000 is accrued at the year end.
Accrued Service Revenue – Debit 10,000
Service Revenue – Credit 10,000
Quick Note
Serial Particular Status of Cash Status of Service
1 Prepaid Expense [Asset] Cash has been Paid Service is yet to Receive
2 Accrued Expense [Liability] Cash is Due to Pay Service has been Received
3 Unearned Revenue [Liability] Cash has been Received Service is yet to Provide
4 Accrued Revenue [Asset] Cash is Due to Receive Service has been Provided
Comprehensive Problem
Adjusting Entries
Mohammed Moin Uddin Reza Nadim
Bangladesh University of Professionals (BUP)
Problem
Terry Thomas opens the Green Thumb Lawn Care Company on April 1.
At April 30, the trial balance shows the following balances for selected
accounts.
Prepaid Insurance 3,600
Equipment 28,000
Notes Payable 20,000
Unearned Service Revenue 4,200
Service Revenue 1,800
Analysis reveals the following additional data.
Problem
1. Prepaid insurance is the cost of a 2-year insurance policy, effective
April 1.
2. Depreciation on the equipment is $500 per month.
3. The note payable is dated April 1. It is a 6-month, 12% note.
4. Seven customers paid for the company’s 6 months’ lawn service
package of $600 beginning in April. The company performed
services for these customers in April.
5. Lawn services provided other customers but not recorded at April
30 totaled $1,500.
Prepare the adjusting entries for the month of April.
Solution 16.1
Problem
Original Trial Balance
Additional Information
1. Pioneer Advertising Agency purchased advertising supplies costing $2,500 on October 5. Sierra
recorded the payment by increasing (debiting) the asset Advertising Supplies. This account shows a
balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on
October 31 reveals that $1,000 of supplies are still on hand.
2. On October 4, Pioneer Advertising Agency paid $600 for a one-year fire insurance policy.
Coverage began on October 1. Pioneer recorded the payment by increasing (debiting) Prepaid
Insurance. This account shows a balance of $600 in the October 31 trial balance. Insurance of $50
($600 / 12) expires each month.
3. Pioneer Advertising estimates depreciation on the office equipment to be $480 a year, or $40 per
month.
Additional Information
4. Pioneer Advertising Agency received $1,200 on October 2 from R. Knox for advertising services expected to
be completed by December 31. Unearned Service Revenue shows a balance of $1,200 in the October 31 trial
balance. Analysis reveals that the company earned $400 of those fees in October.
5. In October Pioneer Advertising Agency earned $200 for advertising services that had not been recorded.
6. Pioneer Advertising Agency signed a three-month note payable in the amount of $5,000 on October 1. The
note requires Pioneer to pay interest at an annual rate of 12%.
7. Pioneer Advertising Agency last paid salaries on October 26; the next payment of salaries will not occur until
November 9. The employees receive total salaries of $2,000 for a five-day work week, or $400 per day. Thus,
accrued salaries at October 31 are $1,200 ($400 x 3 days).
Prepare the Adjusting Entries
Solution
• Now do the adjusted trial balance from the last problem (Pioneer
advertising agency) by yourself. We have solved it in the class.
