Question

Comparing accrual and cash-basis accounting, preparing adjusting entries, and preparing income statements [15-25 min] Sweet Catering completed the following selected transactions during May, 2012: May 1 Prepaid rent for three months, $1,500. 5 Paid electricity expenses, $400. 9 Received cash for meals served to customers, $2,600. 14 Paid cash for kitchen equipment, $2,400. 23 Served a banquet on account, $3,000. 31 Made the adjusting entry for rent (from May 1). 31 Accrued salary expense, $1,400. 31 Recorded depreciation for May on kitchen equipment, $40. Requirements 1. Prepare journal entries for each transaction. 2. Using the journal entries as a guide, show whether each transaction would be handled as a revenue or an expense using both the cash and accrual basis by completing the following table. Amount of Revenue (Expense) for May Date Cash-Basis Amount of Accrual-Basis Amount of Revenue (Expense) Revenue (Expense) 3. After completing the table, calculate the amount of net income or net loss for Sweet Catering under the accrual and cash basis for May. 4. Considering your results from Requirement 3, which method gives the best picture of the true earnings of Sweet Catering? Why?

Answer 1

Answer:
	Sweet Catering
1
No.	Date	Account Titles and Explanation	Debit	Credit
			$	$
1	May-01	Prepaid Rent Account	1500
		Cash Account		1500
2	May-05	Electricity expense account	400
		Cash account		400
3	May-09	Cash account	2600
		Sale of service		2600
4	May-14	Kitchen equipments	2400
		Cash account		2400
5	May-23	Accrued Income	3000
		Sale of service		3000
6	May-31	Rent account	500
		Prepaid Rent Account		500
		(One month rent is due hence set off)
7	May-31	Salary Account	1400
		Salary payable account		1400
8	May-31	Depreciation account	40
		Kitchen equipments		40
2
		Amount of Revenue(Expense) for May
	Date	Cash Basis Amount of Revenue(Expense)	Accrual Basis Amount of Revenue(Expense)
	May-01	(1500)
	May-05	(400)
	May-09	2600
	May-14	(2400)
	May-23		3,000.00
	May-31		(500)
	May-31		(1400)
	May-31		(40)
	Net Income(Loss)	(1700)	1,060.00
From above calcultions it could be said that cash basis gives a true and more realistic view of the accounts, whereas accrual basis focuses on long term perspectives.