224 CHAPTER 10 FUNDING THE BUSINESS
Balance sheet and cash flow (2) – from accruals
Moving on from the previous example, suppose that you had agreed to pay
each December an annual staff bonus equivalent to one month’s salary. Strictly
speaking, you should show one-twelfth of the bonus as an accrued expense each
month, as follows (just three months are shown):
Expenditure account, whole month ... Oct Nov Dec
Employee bonuses ... 1,000 1,000 1,000
Now put the cash flow effects around this:
1 Starting with the January figures, record a matching $1000 accrual each month
(I have only shown three months here because of space constraints).
2 By November, the accruals have reached $11,000.
3 In December, the $11,000 balance on accruals plus the $1000 expenditure
charge for the month equals the $12,000 in bonuses that have to be paid from
cash (charge $12,000 to cash flow).
This is illustrated below. The plus and minus signs might appear confusing at first
glance, until you recall from Chapter 7 that an increase in liabilities is normally
a credit entry so the sign moves the opposite way to everything else. That’s
accountancy for you. The change in the balance sheet (the flow) is added to help
clarify what is going on. The first line of figures shows end-month balances (hence
balance sheet), all the other figures are monthly flows.
Balance sheet, end month Dec Oct Nov Dec
Liabilities: accrued bonuses 9,000 10,000 11,000 0
Memo: change in month ... +1000 +1000 –11,000
Expenditure account, whole month
Employee bonuses ... 1000 1000 1000
Cash flow, whole month
Employee bonuses 0 0 0 –12,000
But that would be misleading …
Balance sheets show balances on a specific date. Remember that the bank balance,
or inventory, or any other figure, might have been very different just a few hours
before the balance was struck. Excuse me for being cynical, but I wonder if anyone
ever massages balances on purpose?
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