Accrual Accounting - Methods of Accounting

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Accrual Accounting Methods of Accounting • Cash – Record revenue when cash is received – Record expense when cash is spent • Accrual – Expenses spread over the time of benefit (e.g. fiscal year) – Revenues matched to expenses Cash Entries • Receive paycheck: – Debit Cash (increases Cash) – Credit Revenue (increases Revenue which increases Net Assets) • Pay electric/gas bill: – Debit Utilities (increases expense which decreases Net Assets) – Credit Cash (decreases Cash) Accrual Accounting requires the use of more Balance Sheet Account Codes than just Cash and Net Assets Accrual Entries #1 • Pay Car Insurance in January: – Debit Prepaid Expense (increases Asset) – Credit Cash (decreases Cash) • Each month, beginning in January: – Debit Insurance Expense 1/12 (increases expense which decreases Net Assets) – Credit Prepaid Expense 1/12 (decreases Asset) Accrual Entry #2 • Each month, beginning in January: – Debit Insurance Expense 1/12 (increases expense which decreases Net Assets) – Credit Insurance Payable 1/12 (increases Liability) • Pay bill in December: – Debit Insurance Payable full amount (decreases Liability) – Credit Cash (decreases Cash) Budgets • Make sure you have enough money to pay all the bills (don’t have a deficit) • A “reality” check to see how you’re doing throughout the year UNM’s Budget • Annual • Very laborious • Can’t really tell how close we are to budget until Fiscal Year End Regents’ Monthly Report • Break annual budget into 1/12 for each month • Accrue large actual revenues and expenditures so that they are also spread on a monthly basis for the fiscal year • Result is monthly comparability between budget and actual Accrual Criteria • Receipts/expenses that occur infrequently during the fiscal year • Excluding Restricted Funds • Materiality level of $100,000 per category – “Category” may be one transaction or multiple related transactions – Departments may choose to accrue at a lower level
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