Accrual Accounting Examples
Accrual Accounting recognizes the revenue earned by the company at the time of sale and recognizes the expenses at the time they are incurred, examples of which include sales of the goods on credit, where the sales will be recorded in the books of account on the date of sale irrespective of whether it is on credit or cash.
Most common examples of accrual accountingAccrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. are given below –
- Sales on Credit
- Purchase on Credit
- Income Tax Expenses
- Rent Paid in Advance
- Interest Received on FD
- Insurance ExpensesInsurance ExpensesInsurance Expense, also called Insurance Premium, is the amount a Company pays to obtain an insurance contract for covering their risk from any unexpected catastrophe. You can calculate it as a fixed percentage of the sum insured & it is paid at a daily pre-specified period.
- Electricity Expenses
- Post-sales discount
- Audit Fees
Let us discuss each one of them in detail with journal entries.
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. recognizes purchase books in his books of account.
In the books of Y Ltd.:
Example #3 – Income Tax Expenses
Income tax expensesIncome Tax ExpensesIncome tax is levied on the income earned by an entity in a financial year as per the norms prescribed in the income tax laws. It results in the outflow of cash as the liability of income tax is paid out through bank transfers to the income tax department. are booked on the basis of 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 of 1st Qtr (Jan’19 to Mar’19) in advance to ABC Ltd on 31st Dec’18.
In this case, rent expenses belong 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 five years on 31.12.2023 but accrued interestAccrued InterestAccrued Interest is the unsettled interest amount which is either earned by the company or which is payable by the company within the same accounting period. 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, a consumer-like entity has to make provision accordingly at the end of the month.
Example #8 – Post sales discount
In regular 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 a monthly basis to match the sales VS discount for giving the correct monthly financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels..
Example #9 – Depreciation
Depreciation is also recorded by the accrual method because there is no cash outflow or inflow involve in depreciation transactions. 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 entryDepreciation Journal EntryDepreciation Journal Entry is the journal entry passed to record the reduction in the value of the fixed assets due to normal wear and tear, normal usage or technological changes, etc. where depreciation account will be debited and the respective fixed asset account will be credited. The main objective of a journal entry for depreciation expense is to abide by the matching principle. 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 have been paid after completion of the year because Audit is happening after completion of the 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 precisely 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 make 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 a 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 –