Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting ?
Under cash basis accounting, expenses and revenues are only documented when payment is received or paid. Before goods and services are paid for, recording is not done. On the other side, accrual basis of accounting, identifies revenue immediately it is earned as well as expenses on products and services immediately they are incurred. The recording is done on revenue regardless of whether cash has been received or not. Similarly, expenses are recorded regardless of whether cash has been paid or not. The accrual method is preferred because a clear record is kept unlike in the cash method where some items may be forgotten before entry is made. Hence, the accrual method is more reliable.
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What is the purpose of a journal and a ledger ?
A journal is utilized to make prime entries. Journal records show transactions as they occurred. Immediately a transaction is made, it’s recorded in the journal. A journal contains columns for debit and credit amounts. Journals are mainly used for daily entries. A ledger is used to record tallies of transactions in the journal. Transactions affecting a specific account are added then recorded in the ledger. Only final entries are recorded in the ledger. Records are made on the debit and credit sides. A ledger is used to prepare final accounts.
Give an example of a contra-asset, and explain how it is recorded on the ledger as a transaction .
A contra-asset is an asset whose entry affects the opposite side of an account. If a debit entry is made on the debit side of an account, a credit entry will have to be made to the credit side to counter the initial entry. For example, cash received from a debtor is recorded in the cash account and the bank account.
Explain what a “prepaid expense” is and how it is recorded on the ledger as a transaction .
A prepaid expense is an outflow compensated for during a certain accounting period but would not be consumed until a later date. Expenses are recorded in the accounting periods in which they are consumed. Since prepaid expenses are not consumed immediately, they should be shown in the records of the accounting period that they are consumed.
What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any?
For-profit organizations pay taxes and must, therefore, record tax expenses but non-profit organizations are exempt from tax thus are not required to record tax expenses. For-profit organizations prepare balance sheets while not-for-profit organizations prepare statements of financial position. For-profit organizations formulate income statements listing revenues, losses, and expenses. Not-for-profit organizations prepare statements of undertakings.
List and record each transaction for S. Zee Outpatient Clinic under the accrual basis of accounting at December 31, 20X1 then develop a balance sheet as of December 31, 20X1, and a statement of operations for the year ended December 31, 20X1
S. Zee Outpatient Clinic
Statement of Operations for the period ending 12/31/20X1
Revenues
Advance from patients 500,000
Unrestricted net assets account increase 300,000
Net assets temporary increase 100,000
Account receivables increase 5,500,000
Outstanding payments 4,500,000
Total Revenue 13,600,000
Expenses
Depreciation 200,000
Equipment purchase 2,000,000
Limited use assets purchase 1,000,000
General expenses increase 1,500,000
Wage increase 2,000,000
Capacitated patients 300,000
Interest payment 50,000
Accounts payable increase 1,500,000
Total Expenses 8,550,000
Operating Income 5,050,000
Long term debts 1,000,000
Long term debts payment -100,000
Unrestricted net assets increase 9,500,000
Balance Sheet as on 12/31/20X1
CURRENT ASSETS CURRENT LIABILITIES
Cash Account Payables
Advance received 500,000 Notes Payable
Interest paid -50,000 Wages
Obligation to patients -300,000
Received payments 4,500,000
Gross Account 4650
Receivables 7,000,000
Less to be collected 500,000 Current Liability
Net Receivables 6,500,000
Prepaid Expenses 1,000,000
Current Assets 12,150,000
Non-Current assets Unrestricted Assets
Equipment and property 2,000,000 Total net assets
Less depreciation 200,000
Net Equipment and Plant 1,800,000 Assets
Long term investment 1,000,000
Less loan payment 100,000 900,000 Restricted permanently
Total non-current assets 2,700,000
TOTAL ASSETS 14,850,000
How do capital structure rations and liquidity rations differ in providing insight into an organization’s ability to pay debt obligations ?
An organizations structure ratio refers to its debt to equity ratio while the liquidity ratio is the ratio of an organization's liquid assets and liabilities. These two types of ratios are used to gauge an organization’s ability to pay its debts. The structure ratio determines what percentage of the organization is run by borrowing. If the ratio is unfavorable, then the body would not be able to pay its debts. The liquidity ratio compares the organization's assets with liabilities. If the liabilities are far more than the assets, debt obligations won’t be met.
Identify and explain two situations where an organization might have increased activity rations but declining profitability.
An organization that may be experiencing high rates of depreciation on its assets while revenues stay constant will register increasing activity ratio. As a result, profitability will reduce due to the effect of depreciation. Similarly, profitability will reduce where the rate of increase in expenses is higher than the rate of increase in revenues. A high total asset turnover ratio will be observed, but the margin of operation will be lower.
References
DiTommaso, M., Ruppel, W., & Larkin, R. F. (2017). Cash versus accrual‐basis accounting. Wiley Not‐for‐Profit GAAP 2017: Interpretation and Application of Generally Accepted Accounting Principles, 11-20.
Engel, C. J. (2016). A Primer on the accounting and reporting requirements for not-for-profit organizations. Journal of Public Management Research, 2(1), 14.
Granof, M. H., Khumawala, S. B., Calabrese, T. D., & Smith, D. L. (2016). Government and Not-for-profit Accounting, Binder Ready Version: Concepts and Practices. John Wiley & Sons.
MSG. (2017). Capital Structure Ratios - Meaning and Importance . Retrieved on 13 December 13, 2017, from managementstudyguide.com: http://www.managementstudyguide.com/capital-structure-ratio.htm.
