Accrual Accounting For Future Event

Accrual Accounting For Future Event

Accrual Accounting For Future Event

My organization is putting on a large paid event in six months. We just started taking $100 reservations by credit card - we get $97, and the credit card processor gets $3. I use the accrual method to keep one set of books that includes the event and the entire organization.

Should I categorize the prepaid reservations as income now, or should I track them in a prepaid reservations liability account now and move them over to income on the day of the event? The credit card companies take their 3% discount now, so it seems I should recognize that expense now.

The problem is that the liability account will still show the gross revenue at $100 per person, which is misleading to the people planning the event. I'd like to be able to show the event planners how much money they have to spend without having to manually subtract the income statement event expenses from the balance sheet event liability. Is that possible? What do you recommend?

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Jul 26, 2023
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Accrual Method Accounting for Prepaid Reservations
by: BB

As you are using the accrual method of accounting, it is generally recommended to track the prepaid reservations as a liability until the event takes place. This approach aligns with the matching principle, which states that revenues and expenses should be recognized in the same accounting period when they are earned and incurred, respectively.

Here's how you can handle the prepaid reservations: Create a Prepaid Reservations Liability account: When you receive the $100 reservations, debit the Prepaid Reservations Liability account and credit the Revenue account for $100. This will record the liability for the reservations yet to be fulfilled.

Account for the credit card processor's fee: Since the credit card processor takes a $3 discount upfront, you can recognize the credit card fee as an expense now. Debit the Credit Card Processor Fee expense account and credit the Prepaid Reservations Liability account for $3.

On the day of the event: Transfer the reservations to income: When the event takes place, transfer the amount from the Prepaid Reservations Liability account to the Income account. Debit the Prepaid Reservations Liability account for the total amount of reservations (e.g., $100 per person) and credit the Income account for the total amount.

This way, your income statement will show the revenue from the event, and the Prepaid Reservations Liability account on the balance sheet will be reduced to zero. You can easily show the event planners how much money is available for spending without manually subtracting expenses from the balance sheet. It provides a more accurate representation of the event's financial status.

Nov 19, 2012
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Bookkeeping Portland
by: mark gerson

Thanks for the great blog on Accrual Accounting for Future Event. I own a Portland Oregon Bookkeeper and Accounting Services company and I'm sure my employees and I will find your information very helpful. Keep up the good work.

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Accrual Basis

by Bita
(NY)

Accrual Basis

Accrual Basis

On October 1, your calendar year company, which is on the accrual basis, signs a $15,000 painting contract and makes a $5,000 advance, which you record in Painting Expense. If, on December 31, management tells you that 20% of the work has been completed, do you debit or credit the painting expense by $2,000?

Hello Bita, Thank you for your question. As 20% of $15,000 is $3,000 and painting expense was already debited $5,000, you would credit the painting expense by $2,000 in order to get to the actual $3,000 expense.

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Apr 02, 2017
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How Can an Expense be Credited
by: Zac

How come an expense is credited, when Expenses are usually debited?

ANSWER: In accounting, expenses are typically debited because they represent decreases in a company's assets or increases in its liabilities. However, there are specific situations where expenses are credited instead of debited. This can occur in the context of adjusting entries and certain expense-related transactions.

One such situation is when reversing an incorrect entry. If an expense was mistakenly recorded, and later the error needs to be corrected, a reversing entry can be made. In this case, the original incorrect expense entry is reversed by crediting the expense account and debiting another relevant account, such as a clearing account.

Another instance is when reducing an accrued expense. Accrued expenses are expenses that have been incurred but not yet paid or recorded in the accounting system. When these expenses are subsequently paid or recognized, a journal entry is made to reduce the accrued expense liability by crediting the expense account and debiting the cash or accounts payable account.

May 01, 2012
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Accrual Basis Accounting Painting Contract Progress
by: sal

Then what happens the day after (next month)?
Is there any other adjustment?

ANSWER: If management informs you that 20% of the painting work has been completed, you should credit the Painting Expense account by $2,000. Here's the rationale behind it:

Initially, when the company signed the $15,000 painting contract and made a $5,000 advance payment, the entry would be:
Debit: Painting Expense - $5,000
Credit: Cash (or Accounts Payable) - $5,000

On December 31, management tells you that 20% of the work has been completed. Since 20% of the total contract amount ($15,000) is $3,000, you should adjust the Painting Expense account to reflect the work completed so far.

To do this, you should reverse the initial entry and record the actual expense based on the progress:
Debit: Cash (or Accounts Payable) - $2,000
Credit: Painting Expense - $2,000

By crediting the Painting Expense account by $2,000, you are reducing the total expense recognized on the contract to match the work completed (20% of $15,000). This will provide a more accurate representation of the company's financials for the period ending on December 31.

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Accrued Expense

by Jon Smith
(shallotte, nc USA)

Accrual Accounting Expense

Accrual Accounting Expense

True or False, with accrued expenses, cash payment follows recording the expense?

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Aug 14, 2023
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Accrued Expense True Or False
by: BB


Jul 26, 2023
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Accrual Accounting Expense
by: BB

True. With accrued expenses, the cash payment typically follows the recording of the expense. Accrued expenses refer to expenses that have been incurred but not yet paid for or recorded in the accounting books. They are recorded as a liability until the actual cash payment is made, which usually occurs at a later date. Once the cash payment is made, the liability is reduced, and the cash account is credited.

Feb 07, 2014
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question
by: Anonymous

I am wondering the same thing on this question

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Accrued Interest Expense

by Elle
(Traralgon Victoria Australia 3844)

Accrued Interest Expense

Accrued Interest Expense

I am really stuck and need some help. I have a bank loan to the amount of $26,624 and the bank loan interest rates are 8% per year. I am stuck with my journal entries and general journal and general ledger for the interest expense and what happens in the balance sheet.

The Bank loan and interest started on the 1 of June and the period ending I am doing the work for is the 30th of June for the same year. The interest expense for the year rounded works out to be 2130. And the monthly payment 178.

In my balance sheet do I include the whole amount for the year under current liabilities minus the first month that it being paid? And my journal entries for interest expense, interest payable and cash at bank, I can't seem to get them to add up. For the ledger and general journal can you please help?

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Jul 26, 2023
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Accrued Interest Expense Journal Entry
by: BB

Hello Elle, Thank you for your question. The initial setup of the loan would be:

DEBIT 26624 Bank Account
CREDIT 26624 Loan

Your first payment would be posted as:

CREDIT Bank Account
DEBIT Loan (for principal amount of payment)
DEBIT Interest Expense (for interest portion of payment)

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Accrued Interest on Loan

by Chris Anderson
(Portland, OR USA)

Accrued Interest on Loan

Accrued Interest on Loan

Should I accrue interest on a loan that my company has defaulted on, and a judgement has been filed against the loan holder?

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Jul 26, 2023
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Defaulted Loan Interest Accrual
by: BB

Accruing interest on a loan that your company has defaulted on, and a judgment has been filed against the loan holder, depends on the accounting standards and legal requirements applicable to your specific situation. It is essential to consult with a qualified accountant or financial advisor to ensure compliance with accounting principles and legal obligations.

In general, if the loan is in default and a judgment has been filed against the loan holder, it is prudent to stop accruing interest on the loan. Defaulting on a loan typically means that the borrower is unable to make payments as agreed upon in the loan agreement. At this point, the loan may be considered non-performing, and interest accrual may not be appropriate.

Additionally, when a judgment has been filed against the loan holder, the loan's terms and conditions may have changed, and further accrual of interest could be affected. Depending on the nature of the judgment, the loan may be considered uncollectible, and interest accrual may not be reasonable.

Accrual of interest is typically done when there is a reasonable expectation of collecting the interest and the loan is still performing. Once the loan is in default and a judgment has been obtained, the accounting treatment for the loan and any related interest may need to be adjusted.

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Accrued Payroll

by Pam
(Old Saybrook, CT)

Accrued Payroll

Accrued Payroll

My Payroll date is the 1st. The payroll company submitted this to the bank on the 30th, therefore showing on bank statement of previous month (Nov) Do I credit cash 10000 - debit accrued payroll in Nov? Reverse for December?

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Jul 26, 2023
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Accrued Basis Payroll
by: BB

Yes, that's correct. When the payroll is processed on the 30th of November but paid on the 1st of December, you would debit the "Accrued Payroll" account in November for $10,000 to recognize the expense for the work done by employees during that period.

Then, in December, when the payroll is actually paid, you would credit the "Cash" account for $10,000 to reflect the payment. This way, the expense is properly recorded in the month it was earned (November), and the cash payment is recorded in the month it was disbursed (December).

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Future Expense Accrual

by David
(Essex)

Future Expense Accrual

Future Expense Accrual

My local church charges wedding couples for the use of the bells and this is shown as an income for weddings in the accounts. This sum is to be accumulated with similar sums ready for future expenditure on maintenance of the bells. What are the entries necessary for this to be shown correctly and how should the actual expenditure be shown when it occurs so as to reduce the accumulated amount and also show as an expenditure?

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Jul 26, 2023
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Accrual For Future Expenses
by: Stephanie

To properly account for the accumulation of funds for future bell maintenance at the local church, the following entries are necessary:

Recording the income from wedding couples for the use of the bells:
Debit: Cash/Bank Account
Credit: Wedding Income

Creating a separate account to accumulate the funds for future bell maintenance (e.g., Bell Maintenance Fund):
Debit: Bell Maintenance Fund
Credit: Wedding Income

When the actual bell maintenance expenditure occurs, the following entries should be made:

Recording the bell maintenance expense:
Debit: Bell Maintenance Expense
Credit: Cash/Bank Account

Reducing the accumulated amount in the Bell Maintenance Fund:
Debit: Wedding Income
Credit: Bell Maintenance Fund

By making these entries, the church will accurately track the funds accumulated for future bell maintenance and properly account for the actual bell maintenance expenses as they occur.

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Proper Vacation Accrual Entry

by Katrina
(Hamilton, Ontario, CA)

Vacation Accrual Entry

Vacation Accrual Entry

After reviewing my companys' past payroll journals, I have found all accrued vacation is being expensed at the time it is accrued. I have always used a payroll clearing account at time of accrual then expensed when the vacation is paid out. Which is the correct method?

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Jul 26, 2023
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Accrued Vacation Expense Accounting
by: BB

Both methods can be considered correct, but they represent different accounting approaches.

Expense at the Time of Accrual: This method recognizes the vacation expense in the period it is earned or accrued by the employees. Accrued vacation is recorded as an expense on the income statement and a liability on the balance sheet. When the vacation is taken and paid out to the employees, the liability is reduced, and the cash is debited while the vacation expense remains the same.

Payroll Clearing Account: This method involves recording the accrued vacation in a payroll clearing account at the time of accrual. When the vacation is paid out, the clearing account is debited, and the liability is reduced. Then, a separate entry is made to transfer the amount from the clearing account to the vacation expense account.

Both methods are acceptable and depend on the company's accounting practices and internal controls. The important thing is to be consistent in applying the chosen method throughout the accounting periods. Some companies may prefer the first method for simplicity and real-time expense recognition, while others may prefer the second method for better tracking and separation of payroll transactions. Consult with your company's accounting department or financial advisor to determine which method aligns best with your specific needs and reporting requirements.

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