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Accrual Basis Accounting for Oracle Apps Beginners

Accrual Basis Accounting records income and expenses based on when they are earned or incurred, providing a more accurate financial picture compared to cash accounting. Revenue is recognized when earned and realizable, while expenses are recognized in the same period as related revenue. The document outlines examples of accrued and deferred revenues and expenses, illustrating how timing differences affect financial reporting.

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7 views3 pages

Accrual Basis Accounting for Oracle Apps Beginners

Accrual Basis Accounting records income and expenses based on when they are earned or incurred, providing a more accurate financial picture compared to cash accounting. Revenue is recognized when earned and realizable, while expenses are recognized in the same period as related revenue. The document outlines examples of accrued and deferred revenues and expenses, illustrating how timing differences affect financial reporting.

Uploaded by

ThatERPGuy
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction:

Accrual Basis Accounting is a system of accounting that matches revenues and expenses, respectively, to
the period they were earned and incurred
With the accrual method, you record income when the sale occurs, whether it is the delivery of a
product or the rendering of a service on your part, regardless of when you get paid.
On the other hand, you record an expense when you receive goods or services, even though you may
not pay for them until later.
The accrual method gives you a more accurate picture of your financial situation than the cash method.
This is because you record income on the books when it is truly earned, and you record expenses when
they are incurred. Income earned in one period is accurately matched against the expenses that
correspond to that period, so you get a better picture of your net profits for each period.
Revenue recognition: Revenue is recognized when both of the following conditions are met,
 Ø Revenue is earned.
 Ø Revenue is realized or realizable.

 Revenue is earned when products are delivered or services are provided. Realized means cash is
received. Realizable means it is reasonable to expect that cash will be received in the
future.Expense recognition: Expense is recognized in the period in which related revenue is
recognized
 Timing differences in recognizing revenues and expenses:
 Four types of timing differences
 1. Accrued Revenue: Revenue is recognized before cash is received.
 2. Accrued Expense: Expense is recognized before cash is paid.
 3. Deferred Revenue: Revenue is recognized after cash is received.
 4. Deferred Expense: Expense is recognized after cash is paid.
 Accrued Revenue Example:
 Example: Products are sold at $5,000 on May 1, 2010 and cash is received on May 10, 2010.

Date
1-May-10 Revenue is recognized.
10-May-10 Cash is received.

Date Account Credit Debit


1-May-10 Accounts receivable 5000
1-May-10 Sales 5000
10-May-10 CASH 5000
10-May-10 Accounts receivable 5000

Accrued Expense Example: On May 1, 2010, Company A borrowed $100,000 from a bank and promised
to pay 12% interest at the end of each quarter.
Date
31-May-10 Interest expense is recognized for May.
30-Jun-10 Cash is paid at the end of the quarter.

Date Account Credit Debit


1-May-10 CASH 100,000
1-May-10 Borrowings From Bank 100,000
31-May-10 Interest expense 1000
31-May-10 Interest Payable 1000
30-Jun-10 Interest expense 1000
30-Jun-10 Interest Payable 1000
30-Jun-10 Interest Payable 2000
30-Jun-10 CASH 2000

Deferred Revenue Example: On May 1, 2010, Company A had a new lease contract with a tenant and
received $6,000 for two month rent.

Date
1-May-10 Cash is received.
May 31 and June 30 2010 Revenue is recognized at the end of May and June

Date Account Credit Debit


1-May-10 CASH 6000
1-May-10 Unearned rent revenue 6000
31-May-10 Unearned rent revenue 3000
31-May-10 rent revenue 3000
6/31/2010 Unearned rent revenue 3000
6/31/2010 rent revenue 3000

Deferred Expense Example: Company A purchased an insurance for a period from May 1, 2010 to July
31, 2010 and paid $6,000 cash for three month insurance premium

Date
1-May-10 Cash is paid.
May 31, June 30, July 31, 2010 Expense is recognized at the end of May, June and
July.

Date Account Credit Debit


1-May-10 Prepaid Insurance 6000
1-May-10 CASH 6000
31-May-10 Insurance Expense 2000
31-May-10 Prepaid Insurance 2000
30-Jun-10 Insurance Expense 2000
30-Jun-10 Prepaid Insurance 2000
31-Jul-10 Insurance Expense 2000
31-Jul-10 Prepaid Insurance 2000

From <https://www.oracleapps2fusion.com/2019/12/accrual-basis-accounting-for-oracle.html?m=0>

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