Problem 1: Accrual basis of accounting is the recognized of revenues when the sale or service occurs regardless of when actual cash is received. It recognizes expenses incurred.
Company X sells $10,000 of widgets on August 8, 2000 (recognized). Company Z pays Company X $10,000 for widgets on October 25, 2000 $10,000 (cash received).
Two Journal Entries should occur:
JE for August 8, 2000 Debit Credit
Accounts Receivable 10,000
Sales 10,000
JE for October 25, 2000
Cash 10,000
Accounts Receivable 10,000
Problem 2: Deferrals occur when adjustments are made to data previously recorded in the accounts. Such adjustments occur in asset and liability accounts to expenses and revenue accounts, respectively.
Prepaid Insurance and prepaid rent are examples of assets until paid up (paid in advance); then they become expenses. The JE would resemble this:
Prepaid Insurance 20,000
Cash 20,000
Purchased rental insurance to cover one-year period
Prepaid Rent 70,000
Cash 70,000
Paid building rental to cover one-year period
These same amounts would be noted in the t accounts to prepaid insurance/insurance expense and prepaid rent/rental expense.
Source: Hermanson, Roger H, Edwards, James D.: Financial Accounting A Business Perspective, seventh ed., 1998