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Note that the above list does not include installment premiums. This is because the decision to use installments versus an up-front premium is often a function of the billing system and does not affect written premium. In the U.S., the total of all known future installment premiums is generally booked up front as written premiums. Installments due but not yet collected are categorized in one premium receivable account, while those to-be-billed in the future and not yet due are in another premium receivable account. The above items may apply to either direct. | THEME ACCRUAL VS. CASH By John W. Day MBA ACCOUNTING Accrual Basis This is the method by which revenues are recorded when earned and expenses are recorded when they are incurred as opposed to a cash-basis method of accounting that measures revenue when cash is received and expenses when they are paid. The accrual method must be used for financial statements to be considered prepared according to Generally Accepted Accounting Principles GAAP . FEATURE ARTICLE Accrual vs. Cash Basis Accounting For the non-accountant this topic can seem as mysterious as the Egyptian pyramids. When working with basic small business financial statements the accrual concept is easy to understand. However in more complex business environments accrual accounting can become as exacting and tedious in its application as nuclear physics. Fortunately we are going to be discussing the former not the latter. You have read the definition of accrual vs. cash above so let s use one of the most common examples of accrual accounting found in small businesses i.e. Accounts Receivable and Accounts Payable. First you must be familiar with how debits and credits work. If you need a quick review click on this link for the Accounting Model http www.reallifeaccounting.com accounting model.asp Let s say you are in the business of selling T-shirts. Today you sold four T-shirts for 10 each. Two of the T-shirts sold were paid for with cash i.e. 20. The other two were sold on account . In other words the customers said they would pay you later. These two transactions have to be recorded differently on your books. Here is the journal entry for the first transaction. DESCRIPTION DEBIT CREDIT Cash 20.00 T-Shirt Sales 20.00 To record Cash sales Does this make sense Check it against the Accounting Model. You increased Cash and you increased Sales so are the amounts recorded properly in the debit and credit columns How about the pay you later transaction We call that a receivable because money is owed to the business.
