2. Accrual Accounting

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Accrual Basis Accounting: Recognizes and reports the economic activities of an entity in the period the economic activity was incurred, regardless of when the cash activity takes place.

Accrual Accounts: Economic event occurs first and cash appears later

Deferral Accounts: Cash is paid first and then economic event occurs

Theme of Accruals and Deferrals

When the economic event occurs first you create an accrual account (you are accruing the cash to be received or to be paid as an asset or liability).

When the cash activity occurs first you create a deferral account (you are deferring the recognition of an expense or revenue as an asset or liability).

Tools

The Accounting Equation: A=L+E

T-Accounts

Accrual Net Income to Cash Net Income: Use Accounting Equation to determine change in working capital accounts

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Continued Accrual Net Income to Cash Net Incomeed Accur

In order to solve these types of problems, you must use the Accounting Equation A=L+E. The formula is further broken down to "Deltas" within each group, i.e. Delta A= Delta L+ Delta E. To solve for Cash Basis, the formula is broken down further to show Delta Cash = Delta L + Delta E - Delta Other Assets. The "Delta A" was broken up between Cash and other assets. Since we are trying to solve/isolate for Delta Cash, we need to move the 2nd part of "Delta A" to the other side of the equation. This leaves us with our formula to solve for Delta Cash= Delta L +Delta E - Delta Other Assets. In order to plug in the correct amounts in the formula, you will need to be provided (or solve for) the Beginning and Ending balances of the accounts given within the problem. Also will need to know what type of account you are dealing with.

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Cash Net Income to Accrual Net Income: Attempting to solve/isolate for Delta Equity

Original Formula: A=L+E

Cash to Accrual formula: Delta E = Delta A - Delta L

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Study this setup. Would be nice to use when these problems are used.

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2nd tool: Using T-Accounts - CPA exam will have you either solve for Cash Received or Revenue Recognized (see image below) or Cash Paid or Expense Recognized

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GAAP: Accrual Accounting Deep Dive