Question

Sweet Catering completed the following selected transactions during May 2016: • May 1: Prepaid rent for three months, $2,400 May 5: Received and paid electricity bill, $220 • May 9: Received cash for meals served to customers, $2,300 • May 14: Paid cash for kitchen equipment, $2,000 May 23: Served a banquet on account, $2,100 • May 31: Made the adjusting entry for rent (from May 1). May 31: Accrued salary expense, $1,100 • May 31: Recorded depreciation for May on kitchen equipment, $480 . Amount of Revenue (Expense) for May Cash Basis Accrual Basis May May 5 May 9 May 14 May 23 May 31 May 31 May 31

Answer 1

Cash basis of accounting is does based on the cash flows only. In simple terms, to record a revenue or expense, a cash inflow or outflow should be there, then only it will be recorded under cash basis of accounting. For example, even though services are provided on account but the cash is not yet received then the service revenue is not recorded because there is no cash received. Similarly, with the expenses where expenses are incurred but not paid then they are not recorded in the books until they are paid.

Accrual basis of accounting is does based on the actual earn of revenue or incur of expenses. In simple terms, to record a revenue or expense, the actual happening of the same revenue or expense should be done, then only it will be recorded under accrual basis of accounting. For example, even though cash is received in advance for services to be performed but the service revenue is not recorded under accrual basis of accounting because the service revenue is not yet earned, similarly with the expenses where expenses are recorded in the books only when they are actually incurred but not when they are paid.

When revenue is actually earned and received then it will be recorded under two methods, similarly, for expenses as well.

The given answer is done based on these rules -

Amount of Revenue (Expense) for May
	Cash Basis	Accrual Basis
May .1	$2,400	$0
May. 5	$220	$220
Mat. 9	$2,300	$2,300
May. 14	$2,000	$0
May. 23	$0	$2,100
Maty. 31	$0	$800	($2,400/3 months)
Maty. 31	$0	$1,100
Maty. 31	$0	$480

May 14th Transaction is assumed to be the kitchen operating costs like food, dinks etc. Suppose, it is an asset (equipment) like any mixer grinder or any machine item or bigger utensils which can be used in future then it is not treated as expense but treated as asset, thus is it not recorded because we are only reporting the revenues or expenses but not assets, hence, May 14th transaction would be $0 under both the methods, please make a note of it.