Accrual Accounts & Advance of customers

Represented by: NIVIKA GUPTA PGDM-1

Accrual Accounting

Introduction
Accrual accounting is the accounting basis where assets, liabilities, equity, income and expenses are recognized in the reporting periods to which they relate, regardless of when cash is received or paid.

The elements of accrual accounting are: assets; liabilities; equity; income; and expenses.

Assets are reported in the Balance Sheet and provide information on the resources deployed in the delivery of outputs, by an Organization. Examples of organizational assets include: cash; receivables; inventories; prepayments; and property, plant and equipment. Liabilities represent debts or amounts owing by an organization and are also reported in the Balance Sheet. Examples of organizational liabilities include: payables; accrued expenses; employee benefit liabilities; and other liabilities.

Equity is the residual interest of the Government in the net assets (assets minus liabilities) and is reported in the Balance Sheet and in greater detail the Statement of Changes in Equity. Equity includes: accumulated funds; reserves; and capital. Income encompasses both revenue (for example, revenue from the delivery of outputs) and gains (for example, a profit resulting from the disposal of an item of plant and equipment). Income is reported in the Operating Statement and provides information on inflows of resources . Examples include: output revenue; sales of goods or services; and grants and subsidies.

Expenses relate to costs incurred (including losses) and are reported in the Operating Statement. The expenses include: salaries and wages; purchases of goods and services; repairs and maintenance; and depreciation.

Types of Accrual Accounting

Accrued Revenue Accrued revenue is income that has been earned but has not been received. The majority of such transactions occur in the service industry because services can take time to complete. An example of such a service would be a painter taking a job to paint a home and not taking payment until the job is completed. If the painter starts painting on May 15, that is when the revenue is recorded, even if he does not finish until May 30. When recording the entry on financial statements, there will be an adjusting entry. The correct asset (for example, Accounts Receivable or Interest Receivable) needs to be debited while the associated revenue account (Service Revenue Earned or Interest Earned) is credited.

Accrued Expenses Accrued expenses are expenses that have accumulated but have yet to be paid. They are shown on financial statements as unpaid, such as the taxes that increase on an unpaid debt account. They become liabilities. Other examples of liabilities are unpaid payroll and incurred taxes. The proper way to record an unpaid accrued expense is to debit the proper expense account and then crediting the related liability. Examples of expense accounts are Interest Expense and Salary Expense. Interest Payable and Salary Payable would be their related counterparts.

Advantages and Disadvantages of an Accrual Based Accounting System

Complexity A disadvantage of accrual based accounting is that it requires more analysis and adds complexity to the accounting system. At the end of each period, the accounting staff needs to analyze each account. Lacks Relationship To Cash Another disadvantage of accrual based accounting involves its relationship to cash flow. Accrual accounting requires the accounting staff to record financial entries, regardless of their relationship to cash flow

Truer Representation Accrual accounting provides the advantage of portraying a truer representation of the company's profitability for the period. Investors and managers who review the company's financial statements see a picture of profitability based on the company's activities that period. The expenses incurred that period are reported, along with the revenues earned Performance Measurement Investors and managers review the performance of various companies regularly. One advantage of accrual accounting is that investors and managers receive an accurate picture of the company's performance for the accounting period. All transactions for the period are included, whether cash was transferred or not. The company shows earned revenues, whether customers paid or will pay in the future.

Advance of Customers

Definition
Sometimes businessmen insist on their customers to make some advance payment. It is generally asked when the value of order is quite large or things ordered are very costly. Customers advance represents a part of the payment towards price on the product (s) which will be delivered at a later date. Customers generally agree to make advances when such goods are not easily available in the market or there is an urgent need of goods. A firm can meet its short-term requirements with the help of customers advances

Merits and Demerits of Customers advances as a source of Short-term Finance

Merits
(a) Interest free: Amount offered as advance is interest free. Hence funds are available without involving financial burden. (b) No tangible security : The seller is not required to deposit any tangible security while seeking advance from the customer. Thus assets remain free of charge. (c) No repayment obligation : Money received as advance is not to be refunded. Hence there are no repayment obligations

Demerits (a) Limited amount : The amount advanced by the customer is subject to the value of the order. Borrowers need may be more than the a amount of advance. (b) Limited period : The period of customers advance is only upto the delivery goods. It can not be reviewed or renewed. (c) Penalty in case of non-delivery of goods : Generally advances are subject to the condition that in case goods are not delivered on time, the order would be cancelled and the advance would have to be refunded along with interest.