Question

Explain how accrual accounting differs from cash-basis accounting) Whittaker Consulting had the following selected transactions in July:
July   1 Prepaid insurance for July through September, $750. 4 Purchased office furniture for cash, $3,500. 5 Performed services and received cash, $1,200. 8 Paid advertising expense, $200. 11 Performed service on account, $3,300. 19 Purchased computer on account, $2,500. 24 Collected for July 11 service. 26 Paid account payable from July 19. 29 Paid salary expense, $1,500. 31 Adjusted for July insurance expense (see July 1). 31 Earned revenue of $400 that was collected in advance back
31 Recorded July depreciation expense on all fixed assets, $260. in June.
Requirements 1. Show how each transaction would be handled (in terms of recognizing revenues and
expenses) using the cash basis and the accrual basis. 2. Compute July income (loss) before tax under each accounting method. 3. Indicate which measure of net income or net loss is preferable. Use the transactions on July 11 and July 24 to explain.
LO 1
M03_HARR7620_11_SE_C03_121-198.indd   185

Answer 1

1. Statement showing effect of each transaction in Rvenue and expenses recognition by Cash or Accrual basis
Date	Transactiom	Amount	Under Cash Basis	Under Accrual Basis
Jul-01	Prepaid Insurance for July to September	750	Full Expenditure will be booked	Partial expenditure for 1 month will be booked and for remainaing amount booked as asset prepaid insurance
04-Jul	Office Fur Purchase for cash	3500	capitalized/expendture booked	capitalized/expendture booked
05-Jul	Performed service and cash received	1200	Revenue should be booked	Revenue should be booked
08-Jul	Paid for Advertising	200	Expenses should be booked	Expenses should be booked
11-Jul	Performed service on account	3300	Revenue will not be booked	Revenue will be booked,
19-Jul	Purchased computer on account	$2,500	Not capitalized/expendture booked	capitalized/expendture booked
24-Jul	Collected for 11-July service	3300	Revenue will be booked	No effect
26-Jul	Paid account payable from July 19	2500	Expenses should be booked	No effect
29-Jul	Paid Salary expense	1500	Expenses should be booked	Expenses should be booked
31-Jul	Adjusted for July Insurance expense		No effect	Partial expenditure for 1 month will be booked and for remainaing amount booked as asset prepaid insurance
31-Jul	Earned revenue which was collected in advance back	400	No effect	Revenue will be booked,
31-Jul	July depreciation expense reorded in June	260	No effect	Adjustment entry should be made.
2. Statement showing July Income/Loss before tax by Cash or Accrual basis
Date	Transactiom	Amount	As per Cash Basis ( Amount in $)	As per Accrual Basis ( Amount in $)
	Revenue
05-Jul	Performed service and cash received	1200	1200	1200
11-Jul	Performed service on account	3300	-	3300
31-Jul	Earned revenue which was collected in advance back	400	-	400
24-Jul	Collected for 11-July service	3300	3300
Less	Expenses
Jul-01	Prepaid Insurance for July to September	750	750	250
08-Jul	Paid for Advertising	200	200	200
29-Jul	Paid Salary expense	1500	1500	1500
31-Jul	Deprecaion for July month		-	260
	Income/(loss) befor etax		2050	2690
3	Accrual basis system is preferable