Question

Chef's Catering completed the following selected transactions during May 2018: May 1 Prepaid rent for three months, 52,400. 5 Received and paid electricity bill, 5700 9 Received cash for meals served to customers, $2,600. 14 Paid cash for kitchen equipment, 53,000. 23 Served a banquet on account, $2,800. 31 Made the adjusting entry for rent (from May 1). 31 Accrued salary expense, $1,600. 31 Recorded depreciation for May on kitchen equipment, 550. Requirements 1. Show whether each transaction would be handled as a revenue or an expense using both the cash basis and accrual basis accounting systems by completing the following table. (Expenses should be shown in parentheses.) Also, indicate the dollar amount of the revenue or expense. The May 1 transaction has been completed as an example. Date Amount of Revenue (Expense) for May Cash Basis Amount of Accrual Basis Amount of Revenue (Expense) Revenue (Expense) May ! 502,400) 2. After completing the table, calculate the amount of net income or net loss for Chef Catering under the accrual basis and cash basis accounting systems for May. 3. Considering your results from Requirement 2. which method gives the best picture of the true earnings of Chef's Catering? Why?

Answer 1

Answer 1:

Date May. 1 May. 5 May. 9 May. 14 May. 23 May. 31 May. 31 May. 31 Amount of Revenue (Expense) for May Cash Basis Amount of Accrual Basis Amount Revenue (Expense) of Revenue (Expense). ($2,400) $0 ($700) ($700) $2,600 $2,600 ($3,000) $0 $2,800 ($800) ($1,600) ($50)

Given transactions are tabulated as above.

May 31 Rent Expense, accrual for May = 2400 / 3 = $800

Answer 2:

Net Income (Loss) under Cash basis = ($3,500)

Net Income (Loss) under Accrual basis basis = $2,250

Working:

Summing up the transaction we net income (loss) as below:

Date May. 1 May. 5 May. 9 May. 14 May. 23 May. 31 May. 31 May. 31 Amount of Revenue (Expense) for May Cash Basis Amount of Accrual Basis Amount Revenue (Expense) of Revenue (Expense) ($2,400) ($700) ($700) $2,600 $2,600 ($3,000) $2,800 ($800) ($1,600) ($50) ($3,500) $2,250 Net Income

Answer 3:

Accrual basis gives best picture of true earnings. It takes care of matching the revenue for the month with expenses incurred to earn such revenue. It accrues revenues and expense for the period and defers expenses which are not for the period.