TT9 Payment of Accrued Expense

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:

Accounting Equation
Payment of Accrued Expense Decrease in Cash at Bank (-)
Decrease in Accruals (-)
Balance Sheet Y1
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
Current Ratio (CR) → Current Assets (CA) / Current Liabilities (CL) → CR = CA / CL

An analysis of financial ratios can be seen here.
Current ratio calculations are as follows:

Calculation of Current Ratio
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.