Question

2. Hal Smith opened Smith’s Management Company on March 1 of the current year. During March, the following transactions occurred and were recorded in the company's books:

1. Smith invested $10,000 cash in the business.
2. The company paid $5,200 for salaries for the month.
3. The company paid $1,600 cash to rent office space for the month.
4. Smith withdrew $5,000 for his personal use from the company.
5. The company received $19,000 cash for management services provided during March.
6. The company provided $12,000 of management services to customers on account.
7. The company paid cash of $500 for monthly utilities.
8. The company received $3,100 cash in advance of providing management services to a customer.

Based on this information, accrual basis net income for March would be:

_____________________

Based on this information, cash basis net income for March would be:

_____________________

Answer 1

• All working forms part of the answer
• When Cash Basis accounting is being followed:

--Revenues are recorded ONLY when Cash is received. If services are provided or Goods are sold but no cash is received, Sales Revenue or Service Revenue will not be recognised.

---Expenses are recorded ONLY when they are paid in Cash,

• Working of Concepts:

Transaction no.	Effect	Effect on Net Income
1	Cash balance is increased, and so does the Capital Stock	No Effect
2	Cash is decreased by the amount.	Expenses of $ 5200 to be recorded.
3	Cash is decreased by the amount.	Expenses of $ 1600 to be recorded.
4	Cash and Equity to be decreased.	No Effect
5	Cash balance will increase.	Recorded as revenue of $ 19000
6	No effect if Cash basis is used as no Cash is received.	No revenue is to be recorded as no cash is received.
7	Cash is decreased by the amount.	Expenses of $ 500 to be recorded.
8	Cash is increased.	Since Cash basis is used, advance received will be treated as Revenue even though the same is not earned.

• Calculation of Cash Basis Net Income:

Income Statement (Cash basis)
Revenues:
Transaction 5	$                                   19,000.00
Transaction 8	$                                     3,100.00
Total revenues	$                                   22,100.00
Expenses:
Transaction 2	$                                     5,200.00
Transaction 3	$                                     1,600.00
Transaction 7	$                                         500.00
Total Expenses	$                                     7,300.00
Net Income - Cash Basis	$                                   14,800.00