ACC 502 DE
Siriwisa Inma
Forum # 1
Topic 1: Distinguish accrual accounting from cash basis of accounting, and explain how accrual accounting is accomplished. Discuss whether accrual accounting is more closely related to a company's goal of profitability or liquidity.
Enterprise funds and internal service funds use full accrual accounting in order to determine full cost - that is both operating costs and capital costs. Having full costs enables managers of these entities to have appropriate data for determining user charges. An Accrual Accounting system, depreciation is a method of allocating the expense of the purchase of a long-term asset over the life of the asset. Conversely, under a cash accounting system, you would recognize expenses on the purchase of long-term assets as you pay cash for them. Under an accrual system, you first capitalize the asset on your balance sheet by debiting your asset (such as equipment or a building), and crediting cash or accounts payable by the same amount. Over the useful life of the asset, you would systematically depreciate it in a way that you feel best reflects the way the asset is used. While the simplest depreciation method is straight-line, there are many different methods out there. At the end of the period, you debit depreciation expense for the amount incurred, and credits accumulate depreciation for the same amount. This recognizes an expense for the current period, while concurrently reducing the carrying value of the asset. Once the asset has been fully depreciated, any final carrying value is known as the "scrap" or residual value.
The Cash Basis of accounting reports only transactions that have been completed in the current reporting period or what has "hit" the checking account (assuming all funds are deposited and disbursed only from that account) - The Accrual Basis of accounting reports all transactions that