Question

Question 2: The following balances were taken from Majan Company. [10 Marks]

Service revenues R.O 5 000

Interest revenues R.O 15 000

Salaries R.O 2 500

Interest expense R.O 1 000

Depreciation expenses R.O 800

Rent expenses R.O 1 200

Electricity Expenses R.O 2 000

Phone expenses R.O 2 000

At the end of accounting period appeared that:

Interest revenues 1300 / month

Service revenues R.O 40 / month

Rent expenses R.O 200 / month.

Electricity expense R.O 500 / month.

Phone expense R.O 800 / month

Interest expense R.O 700

Salaries R.O 200 / month.

Required : Prepare income statement according to cash and accrual basis

Income statement
	Accrual basis	Cash basis

Answer 1

Income statement in the books of majan company ( accrual and cash basis)

Particulars	Accrual Basis	Cash Basis
Revenue:
Service Revenue	R.O 5,000	R.O 40*12
Interest Revenue	15,000	1300*12
Total Revenue	20,000	16,080
Expenses:
Salaries	2,500	200*12
Interest	1,000	700
Depreciation	800	0
Rent	1,200	200*12
Electricity	2,000	500*12
Phone Expenses	2,000	800*12
Total expenses	9,500	21,100
Net income/Loss	R.O 10,500	R.O (5,020)

Note: assume to be company following cash basis of accounting only not modify cash basis.

Recognizing Depreciation

To avoid misunderstanding, it is important to distinguish between the cash basis and the modified cash basis. The cash basis recognizes revenues when collected rather than when earned and expenses when paid rather than incurred. Under the cash basis, long-term assets are not capitalized, and, hence, no depreciation or amortization is recorded. Thus, the major complexities of GAAP are avoided.

The modified cash basis is a hybrid method such combines features of both the cash basis and the accrual basis. Modifications to the cash basis accounting include such items as the capitalization of assets and the accrual of income taxes. If these modifications are made, the resulting balance sheet would include long-term assets, accumulated depreciation, and a liability for income taxes. The income statement would report depreciation expense and income tax expense. Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.