Question

Based on the following transactions, calculate the revenues, expenses, and net income that would be reported on (a) the cash basis and (b) the accrual basis:

• i. Inventory costing $70,000 was purchased on account.
• ii. Inventory costing $60,000 was sold for $100,000. 80% of the sales were for cash.
• iii. Cash collected from credit customers (those who bought on account) totalled $20,000.
• iv. A lease was signed at the beginning of the year, requiring monthly payments of $1,000. The rent for the first month was paid when the lease was signed. After that, the $1,000 rent was paid on the last day of each month, to cover the following month.
• v. Supplies costing $5,500 were purchased for cash. At the end of the year, $500 of the supplies were still unused.
• vi. Wages of $37,500 were paid during the year. Also, wages of $500 remained unpaid at year end.

Answer 1

Accrual Basis	($)	($)	Remarks
Revenues		100000	Sales for $100,000
Expenses
Inventory	60000		Cost of Inventory sold is $60,000
Lease	12000		Annual lease ($1,000 X 12)
Supplies	5000		Supplies costing $5,500 out of which only $5,000 used
Wages	38000	115000	Wages to be paid is $37,500 plus $500 unpaid
Net Income		-15000(Loss)
Cash Basis	($)	($)	Remarks
Revenues		100,000	80% immediate cash sales and 20% realised later($80,000+$20,000)
Expenses
Inventory	0		No payments were made for purhases
Lease	13000		Annual lease($1,000x12 for current year +$1,000 paid in adance a month ended 31-Dec for next year)
Supplies	5500		Supplies costing $5,500 were purchased on cash
Wages	37500	56000	Wages paid in cash
Net Income		44000

Under cash method all expenses actullay incurred in cash are accounted for. However, under accrual basis all expenses for the period whether paid or not are accounted for.

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