Accrual Accounting
Concepts
Chapter 3
Why is Accrual Accounting Needed?
Cash
received
or paid
Revenue
earned
Expense
incurred
Accruing Revenue
Service provided
Customer invoiced
Cash received
Revenue
Recognized
Accruing Expense
Materials purchased
Receive invoice
for purchase
Invoice paid
Expense
Recognized
Family Health Care’s November Transactions
To illustrate accrual concepts of accounting, we will use the
following November 2013 Family Health Care transactions.
a. On November 1, received $1,800 from ILS Company as rent
for the use of Family Health Care’s land as a temporary
parking lot from November 2013 through March 2014.
b. On November 1, paid $2,400 for an insurance premium on a 2year, general business policy.
c. On November 1, paid $6,000 for an insurance premium on a
six-month medical malpractice policy.
d. Dr. Landry invested an additional $5,000 in the business in
exchange for capital stock.
e. Purchased supplies for $240 on account.
Family Health Care’s November Transactions Cont.
f. Purchased $8,500 of office equipment. Paid $1,700 cash as a
down payment, with the remaining $6,800 ($8,500 - $1,700)
due in five monthly installments of $1,360 ($6,800/5)
beginning January 1.
g. Provided services $6,100 to patients on account.
h. Received $5,500 for services provided to patients who paid
cash.
i. Received $4,200 from insurance companies, which paid on
patients’ accounts for services that have been provided.
j. Paid $100 on account for supplies that had been purchased.
k. Expenses paid during November were as follows: wages,
$2,790; rent, $800; utilities, $580; interest, $100; and
miscellaneous, $420.
l. Paid dividends of $1,200 to stockholders (Dr. Landry).
Summary of Accruals and
Deferrals
Deferrals
Revenue earned
Cash received
or paid
Deferrals
or expense
incurred
Accruals
Revenue earned
or expense
incurred
Accruals
Cash received
or paid
Adjustments for Family Health Care
We now analyze the accounts for Family Health Care at the end of
November to determine whether any adjustments are necessary.
Specifically, we will focus on the following adjustment data,
which are typical for most businesses.
Deferred expenses:
1. Prepaid insurance expired, $1,100.
2. Supplies used, $150.
3. Depreciation on office equipment, $160.
Deferred revenue:
4. Unearned revenue earned, $360.
Accrued expense:
5. Wages owed but not paid to employees, $220.
Accrued revenue:
6. Services provided but not billed to insurance companies, $750.
Summary of Transactions for Family Health Care
Accrual Accounting and the Accounting Cycle
Identify
Record
Record
Transactions
Transactions
Adjustments
The Accounting Cycle
Prepare
Financial
Statements
Adjustment for Supplies
Answer each of the following questions concerning
supplies and the adjustment for supplies. (a) The
balance in the supplies account, before adjustment
at the end of the year, is $1,475. What is the amount
of the adjustment if the amount of supplies on hand
at the end of the year is $241? (b) The supplies
account has a balance of $418 (after adjustment),
and the supplies expense account has a balance of
$1,943 at December 31, 2004. If 2004 was the first
year of operations, what was the amount of supplies
purchased during the year?
Wages
The balances of the two wages accounts at
December 31, after adjustments at the end of
the first year of operations, are Wages
Payable, $1,960, and Wages Expense,
$87,430.
Determine the amount of wages paid in cash
during the year.