Question

1. Consider the amount and timing of the following transactions made by I.M. Farmer.

a.November 2018 Purchased, paid for and applied fertilizer for the 2019 grain crop. $38,000.

b. March 2019 Purchased and paid for seed, chemicals, fuel, other variable costs. $65,000.

c. October 2019 Purchased and charged to account fuel for drying. $4,000.

d. November 2019 Part of grain sold for $72,000. Rest placed in storage, valued at $70,000.

e. December 31, 2019 Accrued interest totals $1,200.

f. January 2020 Paid bill for fuel used to dry grain. $4,000.

g. January 2020 Paid accrued interest, $1,200.

h. May 2020 Remaining 2014 grain sold. $65,000.

A) What is the 2019 profit under cash accounting? (Show work)

B) What is the 2019 profit under accrual accounting? (Show work.)

C) Which system is the most accurate reflection of actual farm profit? Why?

Answer 1

Profit under cash bases

In cash based accounting only cash received will be treated as income and amount paid will be only treated as expense

trading and profit and loss under cash accounting

Particulars	debit	particulars	credit
Paid for Seed chemical fuel	65000	sales for cash	72000
Profit	7000
	72000		72000

Profit under accrual bases

Trading and profit and loss account for year 2019 under accural method

Particulars	debit	particulars	credit
Opening stock	38000	sales	72000
Purchases	65000	closing stock	70000
Fuel purchase	4000
accrued interest	1200
profit	33800
	142000		142000

Analysis of cash and accrual methods

In cash based accounting expenses and incomes are recognised only when paid or received but if we want to measure true performance of business we should consider both cash and credit sales as well as closing inventory which is shown in accrued bases accounting but not shown in cash based accounting cash basis is generally used for lowering income