Accruals and Defferals

Example 1: Accrual basis of accounting is the recognized of revenues when the sale or service occurs regardless of when actual cash is received. It recognizes expenses incurred.

Company X sells $10,000 of widgets on August 8, 2000 (recognized). Company Z pays Company X $10,000 for widgets on October 25, 2000 $10,000 (cash received).

Example 2: Deferrals occur when adjustments are made to data previously recorded in the accounts. Such adjustments occur in asset and liability accounts to expenses and revenue accounts, respectively.

Prepaid Insurance and prepaid rent are examples of assets until paid up (paid in advance); then they become expenses. These same amounts would be noted in the t accounts to prepaid insurance/insurance expense and prepaid rent/rental expense.

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