(Learning Objective 1: Explain how accrual accounting differs from cash-basis ac
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(Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting)Hough Consulting had the following selected transactions in July:
July 1 Prepaid insurance for July through September, $4,200.
2 Purchased office furniture for cash, $5,000.
3 Performed consulting services for a client on account, $3,500.
5 Paid advertising expense, $500.
10 Performed consulting services and received cash, $1,500.
20 Purchased a computer on account, $2,500.
25 Collected for July 3 service.
26 Paid account payable from July 20.
29 Paid salary expense, $1,800.
31 Adjusted for July insurance expense (see July 1).
31 Earned revenue of $1,000 that was collected in advance back in June.
31 Recorded July depreciation on fixed assets, $125.
LO USING EXCEL:
1. Show how each transaction would be handled (in terms of recognizing revenues and expenses) using the cash basis and the accrual basis.
2. Compute July income (loss) before tax under each accounting method
3. Indicate which measure of net income or net loss is preferable. Use the transactions on July 3 and July 25 to explain.
(Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting)Hough Consulting had the following selected transactions in July:
Explanation / Answer
Date Accounts Title Dr Cr Cash Basis 1-Jul Insurance expenses $4,200 Cash $4,200 2-Jul Office Furniture $5,000 Cash $5,000 3-Jul No entry 5-Jul Advertsing expenses $500 Cash $500 10-Jul Cash $2,500 Consulting service revenue $2,500 20-Jul No entry 25-Jul Cash $3,500 Consulting service revenue $3,500 29-Jul salary expenses $1,800 Cash $1,800 31-Jul No entry 31-Jul No entry 31-Jul No entry Accurual metho 1-Jul Prepaid Insurance $4,200 Cash $4,200 2-Jul Office Furniture $5,000 Cash $5,000 3-Jul Accounts Receivable $2,500 Consulting service revenue $2,500 5-Jul Advertsing expenses $500 Cash $500 10-Jul Cash $2,500 Accounts Receivable $2,500 20-Jul Computer $2,500 Accounts Paayble $2,500 25-Jul Cash $3,500 Consulting service revenue $3,500 29-Jul salary expenses $1,800 Cash $1,800 31-Jul Insurance xpenses $1,400 Prepaid Insurance $1,400 31-Jul Uneraned service revenue $1,000 Consulting service revenue $1,000 31-Jul Depreciation expenses $125 Accumulated depreciation $125 ans 2 Income statement Cash basis accounting Consulting service revenue 6000 Less: expenses Insurance expenses $4,200 Advertsing expenses $500 salary expenses $1,800 Total expenes $6,500 Net income ($500) Accurual basis Consulting service revenue 7000 Less: expenses Insurance expenses $1,400 Advertsing expenses $500 salary expenses $1,800 Depreciation expenses 125 Total expenes $3,700 Net income $3,300 ans 3 Accurual basis accounting Income statement is preferable as this gives us the correct income for the period as it takes into account all revenue and expense related to the period. The transaction can be cash or accurual both are included. For example on July 3 consulting revenue is earned on account hence this is the income and should be recorded. In accurual system it is recorded but not in cash system. Now as on July 25 the amount was collected so this is not earning revenue but collecting revenue hence it is not an income only collection, so in accural system it i s collection but for cash system it is income
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