Question

Shelly is the office man for XYZ medical practice. In December, XYZ enters into an agreement with a local supply company to provide office supplies on a monthly basis. The terms of the supply agreement indicate that XYZ will pay the supply company $200 every month upon delivery of the supplies, beginning in January. The supply company ships the supplies in December. Shelly must determine which accounting method (cash basis or accrual accounting) is best for XYZ.

respond to the following prompts .

1, How would these transactions be recorded using the cash method?

2,How would these transactions be recorded using the accrual method?

3, Based on your determination of how these transactions would be recorded using each of the two methods, which method do you think Shelly should use and why?

Answer 1

1. How would these transactions be recorded using the cash method?

Answer: Journal Entry: Under Cash method entries are recognized only when a cash payment or receipt has been made. As we are paying for the supplier in January entry will be recognized in the month of January as follows:

Supplies A/C                Dr         xxx

Cash A/C                                              xxx

2. How would these transactions be recorded using the accrual method?

Answer: Under accrual method entries are recognized as and when the liability to pay has been incurred. Here when we received supplies we have incurred the liability to pay to the supplier. So, it will be recognized in the month of December when we have received the supplies.

Supplies A/C                Dr         xxx

Outstanding Liabilities                         xxx

3. Based on your determination of how these transactions would be recorded using each of the two methods, which method do you think Shelly should use and why?

Answer: Based on the consideration of these two methods shelly should use accrual method of accounting because if we follow cash method of accounting the current liabilities may be understated.