Question

What factors are affect the financial statement to be statutory ? Mention it... What are the implications of accrual accounting?

Answer 1

Factors affecting statutory financial reports

• Generally Accepted Accounting Principles (GAAP)
  • Financial statements are prepared in accordance with GAAP, which are the rules and guidelines of financial accounting. These rules determine measurement and recognition policies such as how assets are measured, when liabilities are incurred, when revenues and gains are recognized, and when expenses and losses are incurred. They also dictate what information must be provided in the notes
• Role of the Securities and Exchange Commission
• International Accounting Standards
• Managers
• Monitoring and Enforcement Mechanisms
• Securities and Exchange Commission
• Auditing
• Corporate Governance
• Litigation

Accrual Basis of Accounting

With the accrual basis of accounting, business events and transactions are recorded to the company's books at the time they occur, resulting in financial statements that are more reliable and consistent than the cash basis of accounting, which records transactions at the time cash is exchanged.

Accrual accounting refers to the basis of accounting that recognizes a company’s revenues only at the time it provides an agreed-upon service or delivery of goods, even if cash for the transaction was received in advance or will not be received until a future date. Similarly, expenses are included on the company’s books at the time they are incurred, even if the expense will not be paid until a future date.

Example of Revenue Accrual

To illustrate how accrual accounting impacts a company’s books in relation to revenue, assume that a company performed a job on Aug. 8 for $20,000. The client was invoiced two days later with terms of net 60, or 60 days to pay, and the customer paid on Oct. 3.

Entry to Accrue Revenue

Using the accrual basis of accounting, the revenue that was earned on Aug. 8 would result in the following accrual on the company’s books:

Debit Accounts Receivable 20,000 Credit Revenue 20,000

In contract, the cash basis of accounting would recognize the revenue earned on the job in October, when the cash is received from the customer.

Example of Expense Accrual

On Aug. 14 the company’s bookkeeper received an invoice from a vendor that performed maintenance services in the amount of $6,000 at the beginning of the month. The invoice had terms of net 30 days, which the company paid on Sept. 8.

Entry to Accrue Expense

Using the accrual basis of accounting, the expenses related to the service would be included on the company’s books as a debit to expenses and a credit to accounts payable in August, with the journal entry appearing as follows:

Debit Maintenance and Repair Expenses 6,000 Credit Accounts Payable 6,000

This entry recognizes the expense at the time it is incurred, and not at the time it was paid in September as would be done if the company was using the cash basis of accounting.