Adam elects the accrual method of accounting for his business.
What amount of deductions does Adam recognize in year 0 for the following transactions? (Leave no answers blank. Enter zero if applicable.)
a) Adam guarantees that he will refund the cost of any goods sold to a client if the goods fail within a year of delivery. In October of year 0, Adam agreed to refund $3,550 to clients, and he expects to make payment in January of year 1.
b) On October 1 of year 0, Adam paid $960 for a one-year contract with CleanUP Services to clean his store. The agreement calls for services to be provided on a weekly basis.
c) Adam was billed $465 for annual personal property taxes on his delivery van. Because this was the first time Adam was billed for these taxes, he did not make payment until January. However, he considers the amounts immaterial.

The accrual method is an accounting concept which says income and expense shall be recognized in the Accounting period they occurred and not necessarily when cash was received or paid for them.

Therefore, if I sell a piece of item in this year on credit, even when at year end the payment is still outstanding. Accrual concept expects me to recognize a sales. The same applies to expenses, even when payment haven't been made, a provision should be made for liability while the expense is recognized in the income statement.

A. In Oct year 0 Adam agrees to a liability of $3,550 although payment shall be paid in January Year 1.

Based on Accrual concept. Adam will recognize product returns (deduction in sales) in Year Zero and because he hasn't paid cash as at year end, he will also state his liability in the current liability of his balance sheet

B. Adams paid $960 for a 1 year contract for office cleaning.

Although cash has left the business, only a forth of this payment is due in this financial year. Thus Adams will recognize an expense of $240 in Year 0 and post in his Prepaid Expense account (Current Asset of the Balance sheet) an Asset of $720 owed him by the cleaning agency

C. $465 was levied Adam as annual property taxes because of his delivery van.

Although Adam considers immaterial, and he didn't make a payment until Year 1; the rules of Accrual concept won't be discarded.

In year zero he will recognize the $465 has an expense in his income statement because it is applicable to year zero; but because he differed payment to Year 1 he also must recognize a liability to the state for the amount due in his current liability side of the Balance sheet.

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the metropolitan museum of art. source: anton_ivanov / shutterstock.

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