Question

LO4 Under the cash basis of accounting, revenue is recorded when it is received in cash, and expenses are recorded when they are paid in cash. Under the accrual basis of accounting, revenue is recorded when earned, even if cash is received at an earlier or a later date, and expenses are recorded when incurred, even if cash is to be paid at an earlier or a later date. Considering the following events, match which month the revenue or expenses would be recorded using the accounting method specified.

Collins Company uses the accrual basis of accounting. Crane prepays cash in November for insurance that covers the following month, December, only.

Emily's Natural Company uses the accrual basis of accounting. Emily’s Natural makes a sale to a customer in June but does not expect payment until September.

Patricia's Printing uses the cash basis of accounting. Patricia’s receives cash from customers in March for services to be performed in June.

Wesley's Travel uses the cash basis of accounting. Wesley prepays cash in January for insurance that covers the following month, February, only.

a)January

b)March

c)June

)December

Answer 1

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Collins Company uses the accrual basis of accounting. Crane prepays cash in November for insurance that covers the following month, December, only.
As it is mentioned that insurance covers the following month, December only and Collins Company uses the accrual basis of accounting so,
Insurance expense is for December month.
Option D
Emily's Natural Company uses the accrual basis of accounting. Emily’s Natural makes a sale to a customer in June but does not expect payment until September.
Sale is made in June and Emily's Natural Company uses the accrual basis of accounting so,
Sales is for June month.
Option C
Patricia's Printing uses the cash basis of accounting. Patricia’s receives cash from customers in March for services to be performed in June.
Cash received from customers in March and Patricia's Printing uses the cash basis of accounting so,
Sales is for March month.
Option B
Wesley's Travel uses the cash basis of accounting. Wesley prepays cash in January for insurance that covers the following month, February, only.
As it is mentioned that insurance is paid in January and Wesley's Travel uses the cash basis of accounting so,
Insurance expense is for January month.
Option A