Question

In its first year of operations, Sandhill Co. recognized $33,900 in service revenue, $6,200 of which was on account and still outstanding at year-end. The remaining $27,700 was received in cash from customers.

The company incurred operating expenses of $16,600. Of these expenses, $12,940 were paid in cash; $3,660 was still owed on account at year-end. In addition, Sandhill prepaid $2,670 for insurance coverage that would not be used until the second year of operations.

(a)

Calculate the first year’s net earnings under the cash basis of accounting, and the first year’s net earnings under the accrual basis of accounting.

		Cash Basis		Accrual Basis
Net Income

Answer 1

Solution :

	Cash Basis	Accrual Basis
Service Revenue	$ 27,700	$ 33,900
Less : Operating Expenses	$ 12,940	$ 16,600
Less : Insurance Expenses	$ 2,670
Net Income	$ 12,090	$ 17,300

Accrual basis of Accounting is more useful as it is based on the matching concept and presents true position.

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