acct 130 – w3 dis

A key consideration in financial accounting is understanding the difference between accrual basis accounting and cash basis accounting.  As we have already learned, Generally Accepted Accounting Principles (GAAP) requires that accrual basis accounting be utilized for financial reporting for publicly-traded firms, and in general, the majority of firms utilize accrual basis accounting for financial reporting purposes, even if they are not publicly-traded.  Let’s explore and discuss the differences and implications of accrual basis accounting versus cash basis accounting in our discussion.

Assume that XYZ, Inc. is a relatively small firm, established in December of 2023 (12/01/2023), with a limited understanding of accounting. Thus, they utilize cash-basis accounting. Provide some hypothetical examples of the transactions that XYZ might utilize to record revenues and expenses for a given accounting period (the month ending 1/31/24) utilizing cash basis accounting.You make up both the accounts and the quantities involved in your examples. Again, with cash-basis accounting, transactions are recorded when cash is either received or expended. Please utilize the following format to reflect the cash-basis transactions in January of 2024 in journal entry form:

DR Account Name             XXXX

CR Account Name                  XXXX

Examples could include:

The receipt of cash (in January of 2024) for services provided to a customer in December of 2023.

The disbursement of cash (in January of 2024) for goods or services received in December of 2023.

The payment of an insurance premium (in January of 2024) for coverage for the last quarter of 2023.

The above are examples.  Feel free to create additional examples as you wish.  Please avoid the use of Sales of Inventory, Long-term Asset and Long-Term Liability account transactions – why?  To keep things relatively straight forward at this point.  (

https://www.accountingtools.com/articles/what-are-the-contents-of-a-cash-basis-balance-sheet.html )Links to an external site.

Banks obviously monitor the financial viability of their borrowers.  Assume that XYZ, Inc. must provide accrual basis financial statements to a bank to satisfy a loan agreement at the calendar year end 12/31/23.  XYZ, Inc. still plans on using cash basis accounting going forward in 2024, but needs to provide accrual basis financial statements to their bank.

What adjusting journal entries would you reflect in your accounts to produce a 12/31/23 Income Statement and Balance Sheet to reflect accrual basis accounting results for 2023?  Simply show the adjusting journal entries that you would make to specifically address the January, 2024 cash basis examples that you assumed above to reflect Accrual Basis Accounting for the month ending 12/31/23.  Again,this assumes that the revenue would have been earned or the expense incurred in December of 2023.

Here is one example.

CR  Service Revenues   1,000

If XYZ were to record the transaction on an accrual basis (remember that the revenue was actually earned in December of 2023), the accrual basis entrywould be:

DR Accounts Receivable   1,000

CR Service Revenue                1,000

The primary impact on the financial statements with regard to this example is timing in relation to revenue recognition.  Not a big deal in our simple example, but again, how about if the example transaction was in the millions?