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Accrual Accounting Examples
The following Accrual Accounting example
- Sales on Credit
- Purchase on Credit
- Income Tax Expenses
- Rent Paid in Advance
- Interest Received on FD
- Insurance Expenses
- Electricity Expenses
- Post-sales discount
- Audit Fees
Let us discuss each one of them in detail with journal entries.
Most Common Examples of Accrual Accounting
Example #1 – Sales on Credit
In Accrual Method Transaction has been recorded in the books of accounts at the time of generating sales invoices regardless of whether cash actually received or not.
e.g. – X ltd. Sales goods of $ 500 to Y Ltd.
In the books of X Ltd.
Example #2 – Purchase on Credit
In this accounting, method purchase has been recorded in the books at the time of receipt of material and invoice regardless of the matter that cash has been paid at a later time.
In the above example Y Ltd. Recognize purchase books in his books of account.
In the books of Y Ltd.
Example #3 – Income Tax Expenses
Income tax expenses are booked on the basis of revenue generated in the financial year regardless of the actual payment.
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Journal entries are as below –
Example #4 – Rent Paid in Advance
XYZ Ltd. Paid rent of 1st Qtr (Jan’19 to Mar’19) in advance to ABC Ltd on 31st Dec’18.
In this case rent expenses belongs for the Period Jan’19 to Mar’19 but actually, it has been paid on 31st Dec’18, therefore, it can’t recognize expenses in the month of Dec’18.
Journal entries are as below –
In the books of XYZ Ltd.
Note: Prepaid rent will show in the Assets side of a Balance sheet as on 31.12.2018
In the books of ABC Ltd.
Note: Rent Received in Advance will show in the liability side of a balance sheet as on 31.12.2018
Example #5 – Interest Received on FD
XYZ Ltd has invested $500 in FD @ 5% for 5 Years on 01.01.2019, Full Amount will receive after maturity i.e. after 5 years on 31.12.2023 but accrued interest will recognize every year.
Journal Entry of accrued interest is as below –
Note: Accrued Interest will show in the Assets side of the Balance Sheet as on 31.12.2019.
Example #6 – Insurance Expenses
XYZ Ltd is paying an insurance premium of $800 annually for the period 01.07.2018 to 30.06.2019 on 01.07.2018.
In the above case, 50% insurance premium related for the year 2018 and 50% for the year 2019.
Journal entries are as below –
Note: Insurance Premium Exp of $400 will charge in profit & loss a/c for the year ended 31.12.2018 and Insurance premium paid in Advance of $400 will show in Assets side of a balance sheet as on 31.12.2018.
Example #7 – Electricity Expenses
Electricity Company provides electricity to its consumer on a regular basis and the consumer receives the bill after the end of the month, therefore, consumer-like any entity has to make provision accordingly at the end of the month.
Example #8 – Post sales discount
In normal practice, many companies are giving post-sales discounts to its dealer and distributors quarterly/half yearly/ annually on achieving the target at the end of the scheme period for which company has to make provision on monthly basis 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 there is no cash outflow or inflow involve in depreciation transaction. Depreciation is a reduction in the value of fixed assets over the period because of its use or wear and tear.
e.g. XYZ Ltd has purchased machinery worth $4000 on 01.01.2018 and its useful life is 10 Years. In this case, XYZ Ltd has to pass below depreciation journal entry in his books of accounts.
By doing the above entry value of Machinery will decrease by $400 at the end of the year.
Depreciation will be charged under Profit & loss a/c whereas Machinery will show in the Assets side of a balance sheet as on 31.12.2018 with the value of ($4000 – $400 = $3600).
Example #10 – Audit Fees
In every organization, Audit Fees has been paid after completion of the year because Audit is happening only after completion of Audit Period, therefore, the entity has to take a provision of Audit fees in his books of accounts.
Note: Audit Fees will be charged under Profit & Loss A/c of the year ended 31.12.2018
Accrual Method of accounting gives a fair and correct picture of the business, it shows what is exactly happening in the business on a real-time basis. Expenses and revenue booked in the year for which they are related not at the time of cash inflow or outflow and gives the correct profit & Loss for the year. The accrual method of accounting helps investors also to take decisions. Medium and big organizations are using the accrual method of accounting. Small organizations are not using the accrual method because of its complexity and cost.
In the accrual method system more manpower required as compared to the cash method, therefore, it involves cost also.
This has been a guide to Accrual Accounting Examples. Here we discuss the top 10 most common examples of Accrual Accounting along with its journal entries. You can learn more about Financing from the following articles –