Question

1. Explain in layman's terms the difference(s) between the cash basis and the accrual basis of accounting.
2. Explain what is a prepaid expense account and identify in what financial statement would a prepaid account appear in. (Note: Prepaid asset and prepaid expense are the same.)
3. Provide an example of an asset account that requires adjusting entries (AJE) to record Depreciation expense and the purpose of a contra account (Accumulated Depreciation, XXX).
4. Share what you struggled with the most in this chapter, if any.

Answer 1

1 a)Cash basis : Cash basis of Accounting is a method of accounting where expenses and income are recorded based on actual cash payment of expense or cash receipt of income.

Example :- If rent is $2,000 per month and if full year rent of $24,000 is paid in January the entire expense is charged to Income statement in January month

1 b)Accrual basis : Accrual basis of Accounting is a method of accounting where expense are recorded when it is incurred and revenue is recognized when it is earned.

Example:- If rent is $2,000 per month and not paid in January month it is accounted as expense on accrual basis and charged to Income Statement in January month

2) a)Prepaid expense account appears when Accrual basis of accounting is followed.

For example : if rent is $2,000 per month and paid in January month for full calendar year $24,000 . $22,000 is prepaid rent and hence it is debited to Prepaid Account. every month $2,000 rent expense is transferred from Rent prepaid account to Rent expense account and charged to Income Statement

b)Prepaid Rent will be shown in Balance Sheet under the head Current Assets.

3) Examples of Asset that require that require adjusting entries for Depreciation expense

• Building
• Equipment
• Vehicle

Accumulated Depreciation is a contra way of recording Depreciation expense relating to an asset. All depreciation expense are accumulated in this account and this is deducted from Cost of Asset to show the Net cost in Balance Sheet . Depreciation is an expense charged to Income statement based on Matching principle.