Accrual Basis Accounting for Oracle Apps Beginners

Accrual Basis Accounting for Oracle Apps Beginners

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