Please provide the proper journal entries for the two different types of accrual

Question

Please provide the proper journal entries for the two different types of accruals for Purity Landscaping LLC. Please use accrual base accounting. Transaction # 1: Purity Landscaping Co. usually receives a monthly phone bill for $200, in which a check is issued for immediately. However, for this month end, the bill never came. Transaction # 2: Purity Landscaping Co. The next month has opened up since the period which Transaction # 1 occurred. The bill has now been received and a check will be issued immediately. What is the proper treatment for the accrual journal entry which occurred last month. Discuss why it's important for the accrual to be made in regards to financial reporting.

Explanation / Answer

First months' Journal Entry:

Telephone Expense A/c -------------- Dr. $200

Accounts Payable (Expenses) A/c ------ Cr. $200

(Being the telephone expenses made due for the first month)

Second months' Journal Entry, when the bill has been actually received:

Accounts Payable (Expenses) A/c -------------- Dr. $200

Bank / Cash A/c -------------- Cr. $200

(Being the outstanding telephone expenses for first month paid off)

Why it is important for the accrual to be made in regards to financial reporting:

Under the accrual basis of accounting, revenues are reported on the income statement when they are earned, (unlike, the cash basis of accounting, revenues are reported on the income statement when the cash is received). Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, (unlike, the cash basis of accounting, when the cash is paid). So, in the accrual base accounting system, the revenue of the period are matched with the expenses of that period only. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.

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