Typical Transaction 9
Example: Payment of Accrued Expenses Change Accruals from 300 to 200
The entries for this transaction in the Accounting System can be seen here, in the Accounting Lab, Typical Transaction 9, changes automatically when Typical Transaction 6 changes AccountingLab and in the Accounting System, Operation O11, Q1:
| Payment of Accrued Expense | Decrease in Cash at Bank (-) |
|---|---|
| Decrease in Accruals (-) |
| Balance Sheet | ||
|---|---|---|
| Original | After Changes | |
| Assets | ||
| Current Assets | 767,850 | 767,650 |
| Bank | 758,550 | 758,350 |
| Debtors and Prepayments | 9,300 | 9,300 |
| Other Current Assets (Stock) | 0 | 0 |
| Fixed Assets | 44,000 | 44,000 |
| TOTAL ASSETS | 811,850 | 811,650 |
| Liabilities | ||
| Current Liabilities | 44,300 | 44,100 |
| Creditors | 44,000 | 44,000 |
| Accruals | 300 | 100 |
| Long Term Liabilities | 0 | 0 |
| Long Term Loan | 0 | 0 |
| Equity | 767,550 | 767,650 |
| Shareholders’ Equity | 800,000 | 800,000 |
| Income Statement | -32,450 | -32,450 |
| TOTAL Liabilities + Equity + Retained Earnings | 811,850 | 811,650 |
Analysis
An analysis of financial ratios can be seen here.
Current ratio calculations are as follows:
| Bank | Current Assets | Accruals | Current Liabilities | Income Statement | Equity | Current Ratio | |
|---|---|---|---|---|---|---|---|
| Balance Sheet Original | 758,550 | 767,850 | 300 | 44,300 | -32,450 | 767,550 | 767,850 / 44,300 = 17.3 |
| Balance Sheet New | 758,400 | 767,700 | 100 | 44,100 | -32,450 | 767,650 | 767,650 / 44,100 = 17.4 |
When adjusting for accruals from 300 to 200 in this example, the following changes in the Balance sheets (B/S) and the Income Statement occur:
When paying accruals at different values, from 300 down to 150, as in this example, the following changes in the Balance sheets (B/S) and the Income Statement occur:
– Current Ratio does not change significantly from 17.3 in the original B/S to 17.4 in the new B/S due to the very small change in accruals value. Please refer to Transaction TT 6 for a discussion on the importance of accruals and liquidity.
– Current Liabilities decrease from 44,300 in the original B/S to 44,150 in the new B/S.
– Current Assets decrease, from 767,850 to 767,700, due to a lesser balance in Cash at Bank.
– There is no change in the Income statement as the accrued obligation has already been recorded as an adjustment in the previous period, Month One. Thus, Equity does not change either.