Question

Read each scenario, decide whether the company is using Cash basis or Accrual basis, and then enter your answer to the question.

The Johnny Flowers Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $2,690 for six months of advertising. Johnny Flowers Law Firm recorded $2,690 in the Prepaid Advertising account.
	Accrual basis/Cash basis
	If Johnny Flowers Law Firm had recorded their expenses using the other method, how much advertising expense would they have recorded for the two months ending February 28? Enter this value as a positive number.

Safe Home provides house-sitting for people while they are away on vacation. Some of its customers pay immediately after the job is finished. Some customers ask that the business send them a bill. As of the end of the year, Safe Home has collected $3,340 from cash-paying customers. Safe Home’s remaining customers owe the business $3,220. Safe Home recorded $3,340 of service revenue for the year.
	Accrual basis/Cash basis
	If Safe Home had recorded their service revenue using the other method, how much service revenue would they have recorded for the year?

Marvelous Occasions received $2,970 for services to be performed for the next 8 months on March 31 and recorded this transaction using the Unearned Revenue account.
	Accrual basis/Cash basis
	If Marvelous Occasions had recorded their service revenue using the other method, how much service revenue would they have recorded for the year?

Sweet Catering completed the following selected transactions during May 2016:
May 1: Prepaid rent for three months, $2,100 May 5: Received and paid electricity bill, $170 May 9: Received cash for meals served to customers, $2,980 May 14: Paid cash for kitchen equipment, $3,370 May 23: Served a banquet on account, $2,610 May 31: Made the adjusting entry for rent (from May 1). May 31: Accrued salary expense, $2,950 May 31: Recorded depreciation for May on kitchen equipment, $650
	If Sweet Catering had recorded transactions using the Cash method, how much net income (loss) would they have recorded for the month of May? If there is a loss, enter it with parentheses or a negative sign.
	If Sweet Catering had recorded transactions using the Accrual method, how much net income (loss) would they have recorded for the month of May? If there is a loss, enter it with parentheses or a negative sign.

Answer 1

Under Accrual basis , Accrued Revenue - Accrued expense = Profit or loss

Under Cash basis , total cash received for all transactions relating to business - total cash paid for all transactions relating to business = Profit or loss

D E Answer Question The Johnny Flowers Law Firm prepays for advertising in the local newspaper. On January 1, the In the question cash basis of accounting was followed. In other method of accrual basis of accounting, law firm paid $2,690 for six months of advertising. Johnny Flowers Law Firm recorded $2,690 in the avertising expense that have been recorded for the two months ending february 28 = 2690/6*2=$897 Prepaid Advertising account. Safe Home provides house sitting for people while they are away on vacation. Some of its customers pay immediately after the job is finished. Some In the question cash basis of accounting was customers ask that the business send them a bill. As followed.Under accrual basis of accounting, service of the end of the year, Safe Home has collected revenue that would have been recorded for the year $3,340 from cash-paying customers. Safe Home's will be =3340+3220 = $6560 remaining customers owe the business $3,220. Safe Home recorded $3,340 of service revenue for the year. In the question cash basis of accounting was followed. Under accrual basis of accounting same amount of $2970 will be recorded for the year. Because this much of Marvelous Occasions received $2,970 for services service revenue accrued for the year for the services to to be performed for the next 8 months on March 31 be performed for the next 8 months. This is assumed and recorded this transaction using the Unearned here that Marvelous Occasions had a contract for 8 Revenue account months to be services to be provided.Had it been the service contract more than 1 year then on 31 Dec service revenue to be recorded will be 2970/8*9 =$3341.Here accounting year assumed to be from Ist Jan to 31 Dec

Computation of profit or loss under cash method or accrual method

Under Cash method Cash received Received cash for meals served to customers $2,980 Less: -2100 Less: Cash Paid Prepaid rent for three months Paid electricity bill Paid cash for kitchen equipment Loss under Cash Method -170 Less: -3370 ($2,660)

Under Accrual Method Accrued Revenue Meals served to customers Served a Banquet on account $2,980 $2,610 -700 -170 Accrued Expenses Rent for May 2100/3700 Electricity Bill Accrued Salary Expense Depreciation on kitchen equipment Profit under accrual method -2950 -650 $1,120

Notes : 1) Under accrual basis purchase of kitchen equipment is relating to asset and not to be treated under revenue expense.

2) Served a banquet on account is sale of services under accrual .