Question

Special Purpose Frameworks vs GAAP

X Company is seeking your advice about how to report the year-end balances in its two bank accounts,
as determined by the following bank reconciliations it has prepared for your review:

Account #1
Balance per bank                          $500
Outstanding vendor check           (700)
Balance per books                        ($200)

Account #2
Balance per bank                          ($500)
Undeposited customer check        700
Balance per books                          $200

Required—Briefly describe the advice you should offer X Company under each of the independent
assumptions below, and then offer an equally brief response to the question that follows them.
1. X Company’s financial reporting framework is the tax basis-cash method.
2. X Company’s financial reporting framework is U.S. GAAP.

Answer 1

1. If X company follows tax basis cash method.

Cash method is that type of method where expenses and incomes are recorded when they are realised or when they are paid, as the case maybe.i.e, expenses are recorded only when they are paid and incomes are recorder only when they are received.

By applying this method , bank account balance at year end in first account will be $500.

AS the expense (outstanding vendor check) is not yet honored, it is not considered in books, therefore the balance will be $500

Bank account balance will be ($500) in second account.

As the income of $700 from undeposited customer check is not yet deposited in our bank, it is not recorded in our books,therefore the balance will be $500.

2.If X company follows US GAAP

As per US GAAP expenses and incomes are recorded when they are incurred and not when they are received or paid.

By applying this method , bank account balance of 1st account will be ($200), Even though check is not yet honored, expense is incurred so it has to be recorded in our books ,which brings our balance to ($200).

Bank account balance of 2nd account will be $200, as the check is received with us it can be shown under bank balance even though it is not yet honored.

If the company is following US GAAP then the year end bank balances are correct and if it wants to change to cash basis then the bank account balances are to be updated in the books accordingly.