Question

Masters Consulting had the following selected transactions in August: (Click the icon to view the transactions.) Read the requirements. Requirement 1. Show how each transaction would be handled using the cash basis and the accrual basis. Under each column, give the amount of revenue or expense for August using the cash basis and the accrual basis. (Enter "O" for any transactions that do not affect revenues or expenses. Use parentheses or a minus sign when entering expenses or losses. Round your answers to the nearest whale dollar) Amount of Revenue (Expense) for August Cash Basis Accrual Basis Revenue or (Expense) Revenue or (Expense) i More Info Date August August 1 4 5 8 11 19 24 26 29 31 31 Prepaid insurance for August through October, $1,500. Purchased office furniture for cash, $3,500. Perfarmed services and received cash $1.600. Paid advertising expense, $300. Performed service on account, $3,400. Purchased computer an account. $1.500. Collected for August 11 service. Paid account payable from August 19 Pald salary expense, $800. Adjusted for August insurance expense (see August 1). Eamed revenue of $400 that was collected in advance back in July. Recorded August depreciation expense on all fixed assets, S208. 31 Print Done Requirement 2. Compute August income foss) before tax under each accounting method. Income (loss) before tax

Answer 1

1 & 2

	Cash Basis	Accrual Basis
Aug-01	$           -1,500
4
5	$             1,600	$               1,600
8	$              -300	$                 -300
11		$               3,400
19
24	$             3,400
28
29	$              -800	$                 -800
31		$                 -500
31		$                  400
31	$              -308	$                 -308
Income (Loss) before tax	$             2,092	$               3,492

3.
The accrual basis measure of net income is preferable because it accounts for revenues and expenses when they are incurred, not when they are paid.
For example on Aug 11, the company earned $3400 of revenue and increased its wealth. The accrual basis records this revenue, but cash basis ignores this.
The accrual basis records no revenue on Aug 24
The cash basis waits until cash is received