Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 3 Accrual Accounting Concepts 99

For Family Health Care, revenue is earned when services have been provided to the

patient. At this point, the revenue earning process is complete, and the patient is

legally obligated to pay for the services.

Under the accrual concepts, the matching concept plays an important role in de-

termining when expenses are recorded. When revenues are earned and recorded, all

expenses incurred in generating the revenues must also be recorded, regardless of

whether cash has been paid. In this way, revenues and expenses are matched and the

net income or net loss for the period can be determined. This is an application of the

matching concept that we discussed in Chapter 1. That is, expenses are recognized

and recorded in the same period as the related revenues that they generated and,

thus, net income (loss) can be accurately determined.

Accrual concepts recognize liabilities at the time the business incurs the obligation

to pay for the services or goods purchased. For example, the purchase of supplies on

account would be recorded when the supplies are received and the business has in-

curred the obligation to pay for the supplies.

USING ACCRUAL CONCEPTS OF ACCOUNTING

FOR FAMILY HEALTH CARE’S NOVEMBER

TRANSACTIONS

To illustrate accrual concepts of accounting, we will use the following November 2007

Family Health Care transactions.

a. On November 1, received $1,800 from ILS Company as rent for the use of Family

Health Care’s land as a temporary parking lot from November 2007 through March

2008.

b. On November 1, paid $2,400 for an insurance premium on a two-year, general

business policy.

c. On November 1, paid $6,000 for an insurance premium on a six-month medical

malpractice policy.

d. Dr. Landry invested an additional $5,000 in the business in exchange for capital stock.

e. Purchased supplies for $240 on account.

f. Purchased $8,500 of office equipment. Paid $1,700 cash as a down payment, with

the remaining $6,800 ($8,500$1,700) due in five monthly installments of $1,360

($6,800/5) beginning January 1.

Not Cutting Corners

HOW BUSINESSES MAKE MONEY

Have you ever ordered a hamburger from Wendy’s
and noticed that the meat patty is square? The square
meat patty reflects a business emphasis instilled in
Wendy’s by its founder, Dave Thomas. Mr. Thomas
emphasized offering high-quality products at a fair
price in a friendly atmosphere, without “cutting cor-
ners;” hence, the square meat patty. In the highly

competitive fast-food industry, Dave Thomas’s ap-

proach has enabled Wendy’s to become the third

largest fast-food restaurant chain in the world, with

annual sales of over $7 billion.

Source:Douglas Martin, “Dave Thomas, 69, Wendy’s

Founder, Dies,” The New York Times, January 9, 2002.

Use accrual concepts of
accounting to analyze,
record, and summarize
transactions.

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