I have received wonderful assitance from Pready today, however I just have 2 more clarification requests for income statement items.

I understand that accounts payable and receivable appear on the balance sheet, as previously discussed, however I am stiill confused about their appearance on the income statement.

From my textbook, it indicates that financial reports utilise accrual accounting, not cash accounting. As such, it is not necessary for cash to actually have been paid for the item to be an expense. Expenses are recognised when incurred. So, if accounts payable are things that you are going to pay for in the future (but have already received the goods/services in the reporting period) have you not incurred the expense but not yet paid for it (acrrued expenses) and thus it appears on the income statement as an expense? The text indicates that all expenses incurred in the reported time are recognised in the income statement & expenses incurred but unpaid at reporting date are included as an expense, with the balance sheet recognising a liability.

My question about accounts receivable would probably sound a lot like the rambling above, but I sure you get my drift for both accounts. Although, I understand that income received for as-yet-unrendered servcies is not recognised in the period, even if cash is received.

The more I read the more I confuse myself but the text seems a little clearer (although I may be misinterpreting it) and thus I would like to ask for some more clarification on both accounts. In my issue, both accounts are large & will significantly affect the outcome if I get it wrong!

Sorry to bother you again with this,

Peggy

You are clearly struggling here Peggy. There are a few ways expenses can occur. I will use your electric bill as an example for December (year-end cutoff date)

1. An invoice has been received from the Electric Company for $500 in January 2012. Therefore, we must accrue to close out December based on the prior months amount.

Entry: Electric Expense $450 (pretending that was Novembers)
Accrued Expenses $450 (same effect as a payable on the balance sheet)

When the bill comes we would record the following entry:

Electric Expense 50 (debit)
Accrued Expenses 450 (debit)
Accounts Payable 500 (credit)

Once you pay, the entry is as follows:

Accounts Payable 500 (debit)
Cash 500 (credit)

I am the biggest nerd alive. If you want help, my email I just set up for this site is [email protected]. I'd love to assist you as I think I'll always be a student too since there are always new scenarios they teach in school.

Accounts payable and accounts receivable are the captions used in the balance sheet to describe these assets and liabilities. They do no appear in the income statement. What appears in the income statement is the other side of the entry, the income item, i.e. sales or the expense item, i.e. purchases. You have to get it clear that income, a credit, generates a debit when it gives rise to an asset. In the same way expense, a debit, generates a credit when it gives rise to a liability. A balance sheet is a statement of assets and liabilities, an income statement measures the profit or loss from trading

Accrual accounting is a method of bringing to account the value of activities that have happened but payments have not been received or made at balance date. To give a true picture at balance date these transactions must be included in the calculations

Thank you. I think it is OK now.
Peggy