Question

2.Which of the following outflows would be recorded the same way under both modified accrual and full accrual? (By “the same”, I mean that one would record the same amount as an expenditure that the other records as an expense.)

a		Payment of $1 million for a new building
b		Payment one week after the end of the fiscal year for salaries earned during that year.
c		Depreciation on a building
d		Payment of $1 million to pay principal on an outstanding long-term loan

Answer 1

Full accrual method recognises expenses when they are incurred, regardless of the payment status of charges and records revenue when a legal obligation is created. This means all legal obligations are fulfilled and company has a right to collect

Modified accrual accounting is a mix of cash accounting method and accrual accounting depending upton whether assets are long-term or short-term

Under modified accounting short-term events are recorded under cash method which means an economic events occuring in short term are accounted when cash balance is affected. This means all items in income statement are recorded using cash basis which includes accounts affecting accounts receivable and inventory also

Economic events expected to impact more than one accounting period are recorded using accrual method. This means fixed assets and long term debt are recoded on accrual basis.

Thus, outflows affecting long-term debts as in

a		Payment of $1 million for a new building
c		Depreciation on a building
d		Payment of $1 million to pay principal on an outstanding long-term loan

will be recorded in similar way in modified accrual and full accrual

though payment for a new building and payment of principal are balancesheet items

whereas depreciation on building will be recorded as expense in income statement