Question

Guardian Corp. sells $6,250 of goods on account in the current year and collects $3,250 of this. It incurs $4,200 in expenses on account during the current year and pays $2,600 of them. Guardian would report what amount of net income under the cash and accrual bases of accounting, respectively? O $3,000 on the cash basis and $1,600 on the accrual basis. $3,250 on the cash basis and $4,200 on the accrual basis. $2,050 on the cash basis and $3,000 on the accrual basis. $650 on the cash basis and $2,050 on the accrual basis.

Please check my answer

Answer 1

Under Accrual Basis, Revenue is recognized when it is earned & expense is recognized when it is incurred. It is irrelevant that whether cash is actually paid or received.

Under Cash Basis, Revenue & Expense is recognized when cash is actually received or paid. Revenue Earned & Expense Incurred is irrelevant under this method.

In the present case:-

Total Sale of Goods = $6250

Cash collected for Sale = $3250

Expense incurred = $4200

Cash paid for expense = $2600

Net Income Under Accrual Basis:-

Total Sale – Expense Incurred

= $6250 - $4200 = $2050

Net Income Under Cash Basis:-

Cash Collected for sale – Cash paid for expense

= $3250 - $2600 = $650

Hence $650 on the cash basis & $2050 on accrual basis