Q6 Freddie Handel began a music business in July 2014 Handel

[Q6] Freddie Handel began a music business in July 2014. Handel prepares monthly financial statements and uses the accrual basis of accounting. The following transactions are Handel Company\'s only activities during July through October: Bought music on account for S10, with payment to the supplier due in 90 days; Performed a job on account for Joey Bach for $25, collectible from Back in 30 days Used up all the music purchased on July 14 Collected the $25 receivable from Bach. Paid the $10 owed to the supplier from the July 14 transaction July 14 Aug 3 Sep 16 Oct 22 1. In which month should Handel record the cost of the music as an expense? 2. In which month should Handel report the $25 revenue on its income statement? If Handel company uses the cash basis of accounting instead of the accrual basis, in which month will Handel report revenue and in which month will it report expense? 3. Kevenue Expense

Solution

Under Accrual basis of accounting, expenses are recorded as and when they are incurred (whether paid or not) and revenues are recorded as and when they get accrued (whether realised in cash or not).

Answer 1: Handel should record the cost of music as an expenses in July.

Answer 2: Handel should report the revenue in August.

Under cash basis of accounting, expenses and revenues are recorded when actual cash transaction occurs.

Answer 3: Revenue would be recorded in september; Expense would be recorded in October.