Question

a) Toole Company had the following transactions during 2017:

Sales of $9,200 on account

Collected $6,000 for services to be performed in 2018

Paid $1,580 cash in salaries

Purchased airline tickets for $550 in December for a trip to take place in 2018

What is Toole’s 2017 net income using accrual accounting?

b) Toole Company had the following transactions during 2017:

Sales of $4,200 on account

Collected $6,600 for services to be performed in 2018

Paid $1,630 cash in salaries

Purchased airline tickets for $350 in December for a trip to take place in 2018

What is Toole’s 2017 net income using cash basis accounting?

Answer 1

Answer

A.

Net Income = Sales on account –Salaries Payment

= 9,200 - 1,580

Net Income = 7,620

We are following Accrual Accounting, that means an income is considered Income when it is earned not when cash received and An Expense is considered Expense when it is incurred not when it s paid.

So that’s why Collection of Services is not considered income as it will be earned in 2018 not 2017 and

Purchase of Airline ticket is an expense for 2018 not 2017.

B.

Net Income =Cash received for services to be performed in 2018 – Cash paid for salaries – purchase of Airline ticket

= 6,600 - 1,630 - 350

Net Income = 4,620

We are following Cash Basis accounting, that means an income is considered Income when Cash is received not when its earned and An Expense is considered an expense when it is paid not when it incurred.

That’s why Sales on account is not considered Income because it does not involve cash.