Table Of Contents

Accrual Accounting Examples

Publication Date :

04 Aug, 2021

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Example #1 - Sales On Credit

In the accrual method, the transaction is recorded in the books of accounts when generating sales invoices, regardless of whether cash is received.

For example, X Ltd. sells goods of $500 to Y Ltd.

In the books of X Ltd.:

Example #2 - Purchase On Credit

In this accounting method, the purchase is recorded in the books at the time of receipt of material and invoice regardless of cash paid later.

In the above example, Y Ltd. recognizes purchase books in its books of account.

In the books of Y Ltd.:

Example #3 - Income Tax Expenses

Income tax expenses are booked based on revenue generated in the financial year, regardless of the actual payment.

Journal entries are as below –

Example #4 - Rent Paid In Advance

XYZ Ltd. paid rent for the 1st Q (January 2019 to March 2019) in advance to ABC Ltd on December 31, 2018.

In this case, rent expenses belong for January 2019 to March 2019 but were paid on December 31, 2018. So therefore, it cannot recognize expenses in December 2018.

Journal entries are as below –

In the books of XYZ Ltd.:

rent paid in advance
Note: Prepaid rent will show in the assets side of a balance sheet as on December 31, 2018.
Accrual Accounting Example 4-1

In the books of ABC Ltd.:

Accrual Accounting
Note: Rent received in advance will show on the liability side of a balance sheet as on December 31, 2018.
Accrual Accounting Example 4-3

Example #5 - Interest Received On FD

XXYZ Ltd invested $500 in FD @ 5% for 5 years on January 1, 2019. It will receive the total amount after maturity, i.e., after five years on December 31, 2023, but accrued interest will be recognized every year.

Journal Entry of accrued interest is as below –

Accrual Accounting Example 5
Note: Accrued Interest will show in the assets side of the balance sheet as on December 31, 2019.

Example #6 - Insurance Expenses

XYZ Ltd pays an insurance premium of $800 annually from July 1, 2018, to June 30, 2019, on July 1, 2018.

In the above case, 50% insurance premium is for 2018 and 50% for 2019.

Journal entries are as below –

Accrual Accounting Example 6
Note: Insurance premium exp of $400 will be charged in profit & loss a/c for the year ended December 31, 2018, and insurance premium paid in advance of $400 will be shown on the assets side of a balance sheet as of December 31, 2018.

Example #7 - Electricity Expenses

Electricity company provides electricity to its consumer regularly, and the consumer receives the bill after the end of the month. Therefore, a consumer-like entity has to make provisions accordingly at the end of the month.

Example #8 - Post Sales Discount

In regular practice, many companies give post-sales discounts to their dealers on a quarterly, half-yearly, or annual basis for achieving a target at the end of the scheme period. The company must make monthly provisions to match the sales vs. discount for giving the correct monthly financial statements.

Example #9 - Depreciation

Depreciation is also recorded by the accrual method because no cash outflow or inflow is involved in depreciation transactions. In addition, devaluation reduces the value of fixed assets over the period because of their use or wear and tear.

For example, XYZ Ltd. purchased machinery worth $4,000 on January 1, 2018, and its useful life is 10 Years. In this case, XYZ Ltd. has to pass below depreciation journal entry in its books of accounts.

The above entry value of the machinery will decrease by $400 at the end of the year.

Depreciation will be charged under profit & loss a/c, whereas machinery will be shown on the assets side of a balance sheet as of December 31, 2018, with the value of $3,600 ($4,000 – $400).

Example #10 - Audit Fees

In every organization, audit fees are paid after the completion of the year or after the audit period. Therefore, the entity has to provide audit fees in its books of accounts.

Note: Audit fees will be charged under profit & loss a/c of the year ended December 31, 2018.

Conclusion

The accrual method of accounting gives a fair and correct picture of the business. It shows what is precisely happening in the industry on a real-time basis. Expenses and revenue are booked in the year for which they are related and not at the time of cash inflow or outflow, which give the correct profit & loss for the year. The accrual method of accounting helps investors to make decisions. Medium and large organizations use the accrual method of accounting. Small organizations do not use the accrual method because of its complexity and cost.

More workforce is required in the accrual method than in the cash method. Therefore, it also involves a cost.

Frequently Asked Questions

1. How does accrual accounting differ from cash accounting?

Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash is received or paid. In contrast, cash accounting only recognizes revenue and expenses when cash is received or paid.

2. How does accrual accounting impact financial statements?

Accrual accounting affects financial statements by accurately representing a company's financial position and performance. It shows revenue and expenses when they are earned or incurred rather than when cash is received or paid.

3. How does the matching principle apply to accrual accounting?

The matching principle requires that expenses be recognized in the same period as the revenue they help generate. In accrual accounting, this means that expenses are recorded when they are incurred, regardless of when payment is made or received. As a result, companies can accurately reflect their profitability for a given period by matching expenses to revenue.