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Accrual Accounting: Matching Revenue and Expenses for Balance Sheet Adjustments - Prof. Ba, Study notes of Agricultural engineering

The concept of accrual accounting, focusing on the importance of matching revenue to expenses and making adjustments to ensure accurate balance sheet reporting. It uses examples of crop sales and expenses to illustrate the process, highlighting the difference between cash and accrual accounting methods and the significance of accrual adjustments.

Typology: Study notes

Pre 2010

Uploaded on 08/18/2009

koofers-user-kal
koofers-user-kal 🇺🇸

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Accrual Adjustments - Matching Revenue to Expense
Accrual Balance Sheet Accrual Balance Sheet Accrual Balance Sheet Accrual Balance Sheet
Accrual Balance Sheet
12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
04 wht crop 04 wht crop sold
03 Wheat crop 03 Wht Crop sold earned
revenue earned 05 wht crop earned 05 wht crop sold
04 calf crop earned 05 calf crop earned ’05 calf crop sold
Crop sold
O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M
05 Fuel expense paid 05 Fuel expense
04 Seed expense paid incurred
04 Seed expense incurred
06 Seed expense paid 06 Seed expense incurred
03 Expense paid
03 Repair Expense incurred
In the graphic above the curved, dotted lines show the mis-match between when a revenue is earned and when it is recorded on a cash basis.
These curved lines represent those things that would be adjusted from cash basis to accrual. Notice that this happens with both income and
expense.
The dark vertical lines show the transition from one year to the next, and represent a balance sheet. So each of the things we must make
accrual adjustments for pass over the balance sheet, and should appear on the balance sheet as either an asset or liability.
For example, a repair that was incurred in September of ’03 but not paid unitl June ’04 should be seen on a balance sheet as an account payable.
Also, a crop that was harvested but not sold until the following year will be seen on the balance sheet as crop inventory.
Cash Expense 2003 Cash Expense 2004 Cash Expense 2005 Cash Expense 2006
Cash Income 2003 Cash Income 2004 Cash Income 2005 Cash Income 2006

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Accrual Adjustments - Matching Revenue to Expense

Accrual Balance Sheet

Accrual Balance Sheet

Accrual Balance Sheet

Accrual Balance Sheet

Accrual Balance Sheet

04 wht crop

04 wht crop sold

03 Wheat crop

03 Wht Crop sold

earned

revenue earned

05 wht crop earned

05 wht crop sold

04 calf crop earned

05 calf crop earned

’05 calf crop sold

Crop sold

O N^ D

J^ F

M A M

J^ J^

A^ S^ O N

D^ J^

F^ M A M

J^ J^

A^ S^ O N

D^ J^

F^ M A M

J^ J^

A^ S^ O N

D^ J^

F^ M A M

J^ J^

A^ S^ O N

D^ J^

F^ M

05 Fuel expense paid

05 Fuel expense

04 Seed expense paid

incurred

04 Seed expense incurred

06 Seed expense paid

06 Seed expense incurred

03 Expense paid 03 Repair Expense incurred Cash Expense 2003 In the graphic above the curved, dotted lines show the mis-match between when a revenue is earned and when it is recorded on a cash basis.These curved lines represent those things that would be adjusted from cash basis to accrual. Notice that this happens with both income andexpense.The dark vertical lines show the transition from one year to the next, and represent a balance sheet. So each of the things we must makeaccrual adjustments for pass over the balance sheet, and should appear on the balance sheet as either an asset or liability.For example, a repair that was incurred in September of ’03 but not paid unitl June ’04 should be seen on a balance sheet as an account payable.Also, a crop that was harvested but not sold until the following year will be seen on the balance sheet as crop inventory.

Cash Expense 2004

Cash Expense 2005

Cash Expense 2006

Cash Income 2003

Cash Income 2004

Cash Income 2005

Cash Income 2006