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Accrual vs. Cash Basis Accounting (Oracle Receivables Help)

The document compares Accrual and Cash Basis Accounting, highlighting how transactions affect account balances differently under each method. It explains the treatment of adjustments, chargebacks, and credit memos, detailing the journal entries that occur in various scenarios. Key distinctions include immediate recognition of revenue in Accrual Accounting versus recognition upon payment in Cash Basis Accounting.

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68 views3 pages

Accrual vs. Cash Basis Accounting (Oracle Receivables Help)

The document compares Accrual and Cash Basis Accounting, highlighting how transactions affect account balances differently under each method. It explains the treatment of adjustments, chargebacks, and credit memos, detailing the journal entries that occur in various scenarios. Key distinctions include immediate recognition of revenue in Accrual Accounting versus recognition upon payment in Cash Basis Accounting.

Uploaded by

emmanuelkbr100
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Accrual vs. Cash Basis Accounting


Receivables handles transactions differently depending on the method of accounting you use.

Accrual Accounting Cash Basis Accounting

Creation of transactions such as There is no effect on the account balances until payment is received to
invoices, debit memos, deposits close the transactions.
and chargebacks affect the
account balances immediately.
Accounting Rules may be used to Accounting Rules are redundant as revenue will be recognized only
recognize revenue across different when payment is received.
periods.
Receipts can be reversed using the Receipts can be reversed using the Standard Reversal only. Debit
Standard Reversal or Debit memo Memo reversal is not permitted.
reversal.
Automatic receipts such as Direct Automatic receipts affect the cash balance on the maturity date, if the
Debits and Bills of Exchange GL date = maturity date or on the GL date, if the GL date is after the
affect the cash balance only when maturity date.
the receipts are cleared.
Deposits and Guarantees both Guarantees do not affect on-account balances since there is no
affect on-account balances in exchange of cash. In the case of deposits, the cash collected on
Receivables. deposits will be posted to the revenue account of the deposit instead of
that of the invoice against the deposit. Use the Other Application
report to view all invoices against deposits.
Table 1 - 97. (Table 1 of 1)

Adjustments (Cash Basis Accounting)

When you create an adjustment that has the same sign as that of the related transaction, the adjustment
amount goes to a separate adjustment account, instead of increasing the balance of the original revenue
account.

Consider an example of an invoice created for $1000, followed by an adjustment for $100. The full amount
of $1100 is paid off. The following journal entry is created when cash is received:

DR Cash $1100
CR Revenue $1000
CR Adjustment $100

You have to set up an adjustment account (which is the same as the revenue account) if you want the
adjustment to hit the original revenue account. In this case the journal entry would be:

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DR Cash $1100
CR Revenue $1000 (Original amount)
CR Revenue $100 (Adjustment)

In case of multiple line invoices, Receivables creates a separate account to record the full adjustment.
Consider an example:

DR Cash $1100
CR Line #1 Revenue $800
CR Line #2 Revenue $200
CR Adjustment $100

If you want to prorate the adjustment across the two revenue accounts, you will have to specifically enter two
adjustments of $80 and $20 each to hit the two different revenue accounts. In this scenario, the journal entry
would be as follows:

DR Cash $1100
CR Line #1 Revenue $800 (Original amount)
CR Line #1 Revenue $80 (Adjustment)
CR Line #2 Revenue $200 (Original amount)
CR Line #2 Revenue $20 (Adjustment)

If you make an adjustment that has an opposite sign to the transaction it is adjusting, Receivables does not
record the adjustment in a separate account. Instead, Receivables subtracts the adjustment from the Revenue
account.

Consider an example of an invoice for $2000. If you make an adjustment of -$200 to it, there will be only
one journal entry at the time of receipt of cash:

DR Cash $1800
CR Revenue $1800

The adjustment is not recorded anywhere, it is taken into account by reducing the revenue by the $200.

Chargebacks

When a partial payment is received against an invoice, and you create a chargeback for the remaining amount
due, the journal entry created is:

DR Cash $800
CR Revenue (invoice) $800

No entry will be created when a chargeback is created for the balance $200. However, when cash is received
against this chargeback the following journal entry is created:

DR Cash $200
CR Chargeback Adjustment $200
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Credit Memos and On-Account Credits

Regular credit memos will not be posted, as no cash is exchanged. Therefore, if you use credit memos, ensure
that the accounts on the credit memo are the same as those on the invoices associated with the credit memos.
You can achieve this by setting your profile option AR: Use Invoice Accounting For Credit Memos to Yes.

An on-account credit will be posted when it is applied to an invoice or combined with a cash receipt.

Consider the journal entries created in the following instances:

An on-account credit is issued. No journal entry is created.

The on-account credit is applied to an invoice for $100.

DR Revenue (on-account credit) $100


CR Revenue (invoice) $100

Instead of applying the on-account credit memo to an invoice, the user combines it with a cash receipt of
$200.

DR Cash $200
CR Unapplied Cash $200
DR Revenue (on-account credit) $100
CR Unapplied Cash $100

By applying the on-account credit to a cash receipt, the available unapplied cash balance is increased from
$200 to $300. The user applies the $300 unapplied cash balance to an invoice.

DR Unapplied Cash $300


CR Revenue (Invoice) $300

See Also

Accounting for Transactions (Accrual method)

Journal Entries

Preparing Receivables

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