Question

Assume that Ali Services company bills its clients for jobs completed during the month. On October 31, 2004, Ali Services company billed its clients $450,000 for products sold during October. During November, Ali Services company collected 20 percent of its sales billed on October 31. the cost price this products was $200,000 which is paid 80 percent in cash. What would be recorded by Ali Services company under the cash basis?

Answer 1

According to cash basis of accounting income and expense are recognised in the books of accounts as and when they are received or paid. However according to accrual basis of accounting income and expenses are recorded as and when they occur .

Here as per cash basis of accounting we have to record the cash received on sales and expenses paid as shown in the below journal entry.

Particulars	Debit	Credit
Cash/ Bank A/c                                                Dr	90000
To Revenue		90000
( Being revenue collected as per cash basis)
Purchases A/C                                                  Dr	160000
To Cash/ Bank A/c		160000
( Beiung Cash paid for goods purchased)

Hence Ali services company will recognise revenue of 90000 as against 450000 billed and expense of 160,000 as against 200000 billed in the books of accounts as per cash basis of system.