Accrual basis of accounting

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Accrual basis of accounting

Let's now account for the same series of events, but instead of doing it on a cash basis, let's do it on an accrual basis.

And the whole idea with accrual accounting is to match your revenues and expenses to when you actually perform the service.

So it actually captures business activity, as opposed to just capturing when cash changes hands.

So let's see what that actually means.

So in month one, you cater an event where the cost to you was $100.

The customer pays you $200 for your services.

And what I'll do, I'll do the accrual accounting right here.

So this is kind of the cash income statement.

Let's do the accrual accounting income statement.

So you actually provided the service of catering, you got $200 for your services.

So I'll put $200 in for revenue.

And the expenses associated with that service that you provided in month one is $100.

And so your profit is $100.

So at least for month one, the cash basis and accrual basis of accounting look exactly the same.

And once again, you have $100 in cash.

Now let's go to month two.

You cater an event where the cost to you was $200.

You and the customer agree that they can pay you $400 the next month.

So now it gets interesting, because you performed the catering that month.

And the catering that you performed that month is worth $400.

So in the accrual basis of accounting, would say that you earned $400 of revenue, even though the customer did not pay you.

They did not give you the cash.

And the way that you account for that, is on your balance sheet you say that you are essentially owed $400.

So this accounts receivable, this is essentially stuff that other people owe you.

You need to receive this from other people.

But it's an asset.

Other people have an obligation to you.

So you have an accounts receivable of $400.

When they pay you the $400, it goes from accounts receivable to cash.

And then the cost to you was $200.

So here, all of a sudden, you performed the service, the revenues and expenses for that service are in that month.

And now your profit here shows $200.

So it is actually a better reflection of what you did it that month.

Now, the reality is that you didn't get the cash for it, and you had to spend $200 of cash out of your pocket.

So you're still, just like the cash accounting, you're still going to have negative $100 in cash.

Now, let's go to month three.

You get $400 from the customer the previous month.

Now with cash basis, you would have added that to your revenue.

But here we already accounted for it in the accounts receivable.

We already took that revenue, but because you got the $400 in cash, it's going to just disappear from receivables and then go into cash, because you actually got it.

You get $400 from the customer the previous month.

You also get $200 in advance from a customer that you have to cater for the next month.

So you did no catering in month three, and because you did no catering in month three, you have zero revenue in month three.

And then you also have zero expenses.

The way that you account for the $400 that you got, is that your accounts receivables goes to 0.

And that goes to cash.

So the negative $100, you add $400 to it, so it will become positive $300.

And the way that you account for this $200 in advance from a customer, is you call that deferred revenue.

You've got the cash there.

So we went from negative $100, added $400 to $300.

You get another $200 in cash, so that gives us $500 in cash again.

But we didn't earn any revenue.

That $200, that was a kind of a cash advance.

So we put that right over here in deferred revenue.

That's revenue that we're deferring to a future period.

In the future, we will earn it.

This is now a liability, because we are obligated to earn that revenue.

And then in month four, we actually earn the revenue.

So in month four, we can actually put it on our income statement at $200.

And then we had $100 of expenses.

So we have this $100 right over here.

And so in month four, we earned $100.

And once again, $100 went away from our cash balance.

So we still have $400.

So whether you do the cash basis or the accrual basis, you have the same exact amount of cash.

But what's more interesting is how the profit relates in each of the periods.

And I'll talk about that in a little bit more depth in the next video.

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Accrual basis of accounting발음듣기

다른 번역문 등록

Let's now account for the same series of events, but instead of doing it on a cash basis, let's do it on an accrual basis.발음듣기

다른 번역문 등록

And the whole idea with accrual accounting is to match your revenues and expenses to when you actually perform the service.발음듣기

다른 번역문 등록

So it actually captures business activity, as opposed to just capturing when cash changes hands.발음듣기

다른 번역문 등록

So let's see what that actually means.발음듣기

다른 번역문 등록

So in month one, you cater an event where the cost to you was $100.발음듣기

다른 번역문 등록

The customer pays you $200 for your services.발음듣기

다른 번역문 등록

And what I'll do, I'll do the accrual accounting right here.발음듣기

다른 번역문 등록

So this is kind of the cash income statement.발음듣기

다른 번역문 등록

Let's do the accrual accounting income statement.발음듣기

다른 번역문 등록

So you actually provided the service of catering, you got $200 for your services.발음듣기

다른 번역문 등록

So I'll put $200 in for revenue.발음듣기

다른 번역문 등록

And the expenses associated with that service that you provided in month one is $100.발음듣기

다른 번역문 등록

And so your profit is $100.발음듣기

다른 번역문 등록

So at least for month one, the cash basis and accrual basis of accounting look exactly the same.발음듣기

다른 번역문 등록

And once again, you have $100 in cash.발음듣기

다른 번역문 등록

Now let's go to month two.발음듣기

다른 번역문 등록

You cater an event where the cost to you was $200.발음듣기

다른 번역문 등록

You and the customer agree that they can pay you $400 the next month.발음듣기

다른 번역문 등록

So now it gets interesting, because you performed the catering that month.발음듣기

다른 번역문 등록

And the catering that you performed that month is worth $400.발음듣기

다른 번역문 등록

So in the accrual basis of accounting, would say that you earned $400 of revenue, even though the customer did not pay you.발음듣기

다른 번역문 등록

They did not give you the cash.발음듣기

다른 번역문 등록

And the way that you account for that, is on your balance sheet you say that you are essentially owed $400.발음듣기

다른 번역문 등록

So this accounts receivable, this is essentially stuff that other people owe you.발음듣기

다른 번역문 등록

You need to receive this from other people.발음듣기

다른 번역문 등록

But it's an asset.발음듣기

다른 번역문 등록

Other people have an obligation to you.발음듣기

다른 번역문 등록

So you have an accounts receivable of $400.발음듣기

다른 번역문 등록

When they pay you the $400, it goes from accounts receivable to cash.발음듣기

다른 번역문 등록

And then the cost to you was $200.발음듣기

다른 번역문 등록

So here, all of a sudden, you performed the service, the revenues and expenses for that service are in that month.발음듣기

다른 번역문 등록

And now your profit here shows $200.발음듣기

다른 번역문 등록

So it is actually a better reflection of what you did it that month.발음듣기

다른 번역문 등록

Now, the reality is that you didn't get the cash for it, and you had to spend $200 of cash out of your pocket.발음듣기

다른 번역문 등록

So you're still, just like the cash accounting, you're still going to have negative $100 in cash.발음듣기

다른 번역문 등록

Now, let's go to month three.발음듣기

다른 번역문 등록

You get $400 from the customer the previous month.발음듣기

다른 번역문 등록

Now with cash basis, you would have added that to your revenue.발음듣기

다른 번역문 등록

But here we already accounted for it in the accounts receivable.발음듣기

다른 번역문 등록

We already took that revenue, but because you got the $400 in cash, it's going to just disappear from receivables and then go into cash, because you actually got it.발음듣기

다른 번역문 등록

You get $400 from the customer the previous month.발음듣기

다른 번역문 등록

You also get $200 in advance from a customer that you have to cater for the next month.발음듣기

다른 번역문 등록

So you did no catering in month three, and because you did no catering in month three, you have zero revenue in month three.발음듣기

다른 번역문 등록

And then you also have zero expenses.발음듣기

다른 번역문 등록

The way that you account for the $400 that you got, is that your accounts receivables goes to 0.발음듣기

다른 번역문 등록

And that goes to cash.발음듣기

다른 번역문 등록

So the negative $100, you add $400 to it, so it will become positive $300.발음듣기

다른 번역문 등록

And the way that you account for this $200 in advance from a customer, is you call that deferred revenue.발음듣기

다른 번역문 등록

You've got the cash there.발음듣기

다른 번역문 등록

So we went from negative $100, added $400 to $300.발음듣기

다른 번역문 등록

You get another $200 in cash, so that gives us $500 in cash again.발음듣기

다른 번역문 등록

But we didn't earn any revenue.발음듣기

다른 번역문 등록

That $200, that was a kind of a cash advance.발음듣기

다른 번역문 등록

So we put that right over here in deferred revenue.발음듣기

다른 번역문 등록

That's revenue that we're deferring to a future period.발음듣기

다른 번역문 등록

In the future, we will earn it.발음듣기

다른 번역문 등록

This is now a liability, because we are obligated to earn that revenue.발음듣기

다른 번역문 등록

And then in month four, we actually earn the revenue.발음듣기

다른 번역문 등록

So in month four, we can actually put it on our income statement at $200.발음듣기

다른 번역문 등록

And then we had $100 of expenses.발음듣기

다른 번역문 등록

So we have this $100 right over here.발음듣기

다른 번역문 등록

And so in month four, we earned $100.발음듣기

다른 번역문 등록

And once again, $100 went away from our cash balance.발음듣기

다른 번역문 등록

So we still have $400.발음듣기

다른 번역문 등록

So whether you do the cash basis or the accrual basis, you have the same exact amount of cash.발음듣기

다른 번역문 등록

But what's more interesting is how the profit relates in each of the periods.발음듣기

다른 번역문 등록

And I'll talk about that in a little bit more depth in the next video.발음듣기

다른 번역문 등록

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