Chapter 1
Financial Statements: Personal Accounting
19
According to accrual-based accounting, expenses are always recorded when they are incurred.This
has nothing to do with when the cash payment is made. If we assume an expense is $100, there are
three possible timings the payment can be made in relation to the expense being incurred.
1. Pay before and recognize the expense when it is incurred (prepaid expense).
2. Pay as the expense is incurred (cash).
3. Pay after the expense is incurred (unpaid account).
2
ASSETS
PERSONAL BALANCE SHEET
LIABILITIES
CASH
PREPAID EXPENSES
HOUSE
AUTOMOBILE
CONTENTS
OF HOME
UNPAID ACCOUNTS
MORTGAGE
LOANS
NETWORTH
3. +$100
1a. -$100
2. -$100
1a. +$100
1b. -$100
1b. + $100
2. + $100
3. + $100
EXPENSE
In all three cases, net worth decreases by $100 which is
recognized as an expense and recorded on the income statement
In all three cases, the expense is
recorded when it is incurred, regardless
of when the cash is actually paid.
______________
FIGURE 1.34
(1) Pay as the expense is incurred
(3) Pay after the expense is incurred
+
+
UNPAID ACCOUNTS
EXPENSE
-
-
INCREASE
INCREASE
DECREASE
DECREASE
3. 100
3. 100
+
+
CASH
EXPENSE
-
-
INCREASE
INCREASE
DECREASE
DECREASE
2. 100
2. 100
+
+
PREPAID EXPENSES
EXPENSE
-
-
INCREASE
INCREASE
DECREASE
DECREASE
1b. 100
1b. 100
+
+
CASH
PREPAID EXPENSES
-
-
INCREASE
INCREASE
DECREASE
DECREASE
1a. 100
1a. 100
(1) Pay before and recognize the expense
when it is incurred
______________
FIGURE 1.35
