Question

Cash basis accounting versus accrual basis accounting:

Given the following information

On August 1, Richardson Company received $9,300 for six months of rent in advance.

Accrual accounting affects the Income Statement and the Balance Sheet. Consider the information above. Construct an Income Statement for August 30 and December 31 using only cash basis accounting and then another statement for August 30 and December 31 using accrual accounting.

Discuss the differences between the two August 30 Income Statements and the December 31 Income Statements.Use the following to guide you:

Cash Basis Income Statement Accrual Basis Income Statement

Revenues Revenue

Less Expenses    Less Expenses

Net Income Net Income

Answer 1

Solution:

Cash basis Income Statement
For period ended August 31
Particulars	Amount
Revenue	$9,300.00
Less : Expense	$0.00
Net Income	$9,300.00

Accrual basis Income Statement
For period ended August 31
Particulars	Amount
Revenue ($9,300*1/6)	$1,550.00
Less : Expense	$0.00
Net Income	$1,550.00

Difference in income for aug 30 for cash basis income statement and accural basis income statement is due to time for recognition of income. In cash basis accounting, income is recognized as and when cash is received irrespective of services are provided or not. In accural basis of accounting, income is recognized when services has been performed irrespective cash received or not. Therefore rent collected in advance for 6 month was not earned upto August 31 as per accural basis income statement, therefore advance rent will be shown as unearned income in balance sheet.

Cash basis Income Statement
For period ended December 31
Particulars	Amount
Revenue	$9,300.00
Less : Expense	$0.00
Net Income	$9,300.00

Accrual basis Income Statement
For period ended December 31
Particulars	Amount
Revenue ($9,300*5/6)	$7,750.00
Less : Expense	$0.00
Net Income	$7,750.00

Difference in income for Dec 31 for cash basis income statement and accural basis income statement is due to time for recognition of income. In cash basis accounting, income is recognized as and when cash is received irrespective of services are provided or not. In accural basis of accounting, income is recognized when services has been performed irrespective cash received or not. Therefore rent collected in advance for 6 month was not earned upto December 31 as per accural basis income statement, therefore advance rent will be shown as unearned income in balance sheet.