Question

Total Pool Services earned $130,000 of service revenue during 2018. Of the $130,000 earned, the business received $105,000 in cash. The remaining an $25,000, was still owed by customers as of December 31. In addition, Total Pool Services incurred $85,000 of expenses during the year. As of December 31, $10,000 of the expenses still needed to be paid. In addition, Total Pool Services prepaid $5,000 cash in December 2018 for expenses incurred during the next year. 1. Determine the amount of service revenue and expenses for 2018 using a cash basis accounting system. 2. Determine the amount of service revenue and expenses for 2018 using an accrual basis accounting system, 1. Determine the amount of service revenue and expenses for 2018 using a cash basis accounting system, Cash basis Service revenue Expenses

Answer 1

1. In cash basis, all revenues and expenses will be recognised at the time when cash is recieved or paid out, All cash transaction will be included

Service revenue = $105,000

Expenses = (85,000 - 10,000) + 5,000

= 75,000 + 5,000

= 80,000

2. In accrual basis, all revenues and expenses are recognised when they occur in that period.

Service revenue = $130,000

Expenses = $85,000

$5,000 prepaid expense will not be included because the expense has not occured in that period, rather it is considered as an asset.