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Accrual vs. Cash Basis Accounting

Accrual vs. Cash Basis Accounting

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  1. Explain the difference between the accrual basis of accounting and the cash basis of accounting. What are the major reasons for using accrual accounting?
  2. What are the purpose of a journal and a ledger?
  3. Give an example of a contra-asset, and explain how it is recorded on the ledger as a transaction.
  4. Explain what a “prepaid expense” is and how it is recorded on the ledger as a transaction.
  5. What are the major differences in recording transactions for a for-profit organization versus a not-for-profit, or are there any?
  6. 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.
    • The clinic received a $3,000,000 of unrestricted cash contribution from the community. (Hint: this transaction increases the unrestricted net assets account.)
    • The clinic purchased $2,000,000 of equipment. The clinic paid cash for the equipment.
    • The clinic borrowed $1,000,000 from the bank a long-term basis,
    • The clinic purchased $1,500,000 of supplies on credit.
    • The clinic provided $5,500,000 services on credit.
    • In the provision of these services, the clinic used $1,000,000 of supplies.
    • The clinic received $500,000 in advance to care for capacitated patients.
    • The clinic incurred $2,000,000 in labor expenses and paid cash for them.
    • The clinic incurred $1,500,000 in general expenses and paid cash for them.
    • The clinic received $4,500,000 form patients and their third parties in payment of outstanding accounts.
    • The clinic met $300,000 of its obligation to capacitated patients in Transaction g.
    • The clinic made a $100,000 cash payment on the long-term loan.
    • The clinic also made a cash interest payment of $50,000.
    • A donor made a temporarily restricted donation of $100,000 to be used for operations.
    • The clinic recognized $200,000 in depreciation for the year.
    • The clinic recognized $500,000 of patient accounts would not be received.
  7. How do capital structure rations and liquidity rations differ in providing insight into an organization’s ability to pay debt obligations?
  8. Identify and explain two situations where an organization might have increasing activity rations but declining profitability

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