Zeratul
Major Contributor
Joined: 11 Jun 2009
Online Status: Offline
Posts: 987
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| Posted: 13 Sep 2009 at 10:24 | IP Logged
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lovethepirk wrote:
Zeratul,Could you flip the scenarios at the bottom of your last post and assume Accrued expenses go up and AR goes up. I am going to take a stab and slap me around a bit please, cause this took a while for me to wrap my arms around...For A/R going up I see this as accrued revenue matching for a future time meaning:AR xxxx Sales xxx xMeaning Accrual basis NI will be higher due to sales rising.But for accrued expenses which I think means accounts payable...you have this entry:Purchases xxxx ; AP &nbs p; xxxxI don't see how this would affect the Net Income between cash and accrual basis as no sales/revenue or expense account is modified?Thanks,ltp
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Your analysis of A/R is correct.
Accrued expenses is a liability like A/P. However A/P is tied to the purchase of inventory. The way that changes in A/P affect accrual vs cash basis NI is through Cost of Goods Sold. If A/P is higher, it means you acquired more inventory than you paid for in cash, and CGS would be higher than actual cash paid to suppliers. Do note that you also have to examine changes to the Inventory account to reconcile CGS to cash paid for inventory. The effect on cash vs. accrual is identical to A/R.
Remember adjusting entries? In many cases, you'll find yourself on B/S date with salaries, for example, which you won't yet be paying in cash but which must be recognized in this period when incurred. In the example of salary, the entry would be:
Salary expense DR xxx
Accrued salary expense CR xxx
This rise in accrued expense is going to make accrual basis net income lower than cash basis net income, since this expense will not be reflected in cash basis net income.
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Topic: accrual and cash basis
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