Question

The Flower Fern Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $2,000 for five months of advertising How much advertising expense should Flower Fern Law Firm record for the two months ending February 28 under the a. cash basis? b. accrual basis? a. Under the cash basis, for the two months ending February 28, the law fimm should record advertising expense of b. Under the accrual basis for the two months ending February 28, the law firm should record advertising expense of Enter any number in the edit fields and then continue to the next question

Answer 1

Under the cash basis, Flower Fern Law Firm will record $ 2,000 of advertising expenses for the two months ending February 28.

Under the accural basis, Flower Fern Law Firm will record $ 800 of advertising expenses for the two months ending February 28.

The difference between cash and accrual accounting is on account of timing of when income and expenses are recorded in your accounts. Cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. Accrual basis of accounting is where revenues and expenses are recorded when they are accrued irrespective of when the money is actually received or paid.

In the above question under cash basis Flower Fern Law Firm will record $ 2,000 of advertising expenses, because cash is paid irrespective of which period relates to. There is no concept of receviable or payable under cash basis of accouting.

However Under the accural basis, Flower Fern Law Firm will record $ 800 of advertising expenses, because the advertisement fees pertains to the period of five months. The firm will record advertisment expense for two months (i.e. January and February) or the two months ending February 28. Balance three months (i.e. March, April and May) will be recorded in respecitve months.

Advertisement Cost - $ 2,000

Tenure - 5 month

Per Month Advertisement Cost - $2000/ 5 months = $400 per month

Advertisment Cost for Jan and Feb = $ 400 *2 = $ 800.