1. Under cash-basis accounting, when is revenue recorded? When is it recorded un

Question

1.         Under cash-basis accounting, when is revenue recorded? When is it recorded under accrual-basis accounting?

2.         Under accrual accounting, when is revenue considered earned?

3.         If a membership represents an advance payment for services provided, when is it recognized as revenue under the accrual basis, and what is it called?

4.         Why is insurance expense spread over multiple periods even though the policy coverage is paid in advance?

5.         At the end of the month for Silver’s Gym, what entries need to be made under the cash basis of accounting for wages that have not yet been paid? What entries need to be made under the accrual method?

6.         Why is it important to match expenses and revenues to reflect the performance of a business over a particular time period?

7.         When might the use of cash basis accounting overstate the actual profits earned by Silver’s gym? When might it understate the actual profits earned?

8.         Which basis of accounting is in accordance with GAAP for large companies?

Explanation / Answer

Ans. 1. Under cash accounting revenure is accounted when revenue from sale of goods or services has been realised.

However under accrual accounting Revenue is recognized when both of the following conditions are met:
    a. Revenue is earned.
    b. Revenue is realized or realizable.

Ans. 2 Revenue is earned when products are delivered or services are provided

Ans. 3. Membership will be recognized when such service will be performed. It is called unearned revenue.

Ans. 4. Insurance expenses is spread over multiple period because it is not paid for a single month but it is paid for multiple uniform period.

Ans. 5. Under cash basis of accounting no entry will be made.

However under accrual basis of accounting following entry will be made:

Wage Expenses A/c Dr.

Wage Expenses Payable A/C Cr.

Ans. 6.

Ans. 7 . If revnue was not realised and payment has been made for expenses incurred. Only in that case it understate the actual profit.

Ans. 8, Accrual basis of accounting is in accordance with GAAP for large companies.

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