P367B Learning Objective 1 Explain how accrual accounting di

P3-67B. (Learning Objective 1: Explain how accrual accounting differs from cash-basis accounting) Whittaker Consulting had the following selected transactions in July: LO July 1 4 Prepaid insurance for July through September, $750 Purchased office furniture for cash, $3,500 Performed services and received cash, $1,200. Paid advertising expense, $200. Performed service on account, $3,300. Purchased computer on account, $2,500. Collected for July 11 service. Paid account payable from July 19 Paid salary expense, $1,500 Adjusted for July insurance expense (see July 1) Earned revenue of $400 that was collected in advance back in June Recorded July depreciation expense on all fixed assets, $260. 19 24 26 29 31 31 31 Requirements 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 11 and July 24 to explain

Solution

1) Please find the below entries to know how transactions will be treated under both the systems

Cash basis

Accrual basis

Account receivable

Service revenue

3300

Computer

Accounts payable

2500

2500

Insurance expense

Prepaid insurance expense

250

250

Advance received towards revenue

Service revenue

400

400

2) Income/(loss) before tax under each method

Cash basis

= Service revenue - All expenses

= 1200 + 3300 - (750+200+1500+260)

= $ 1790

Accrual basis

= Service revenue - All expenses

= 1200 + 3300 + 400 - (200+1500+250+260)

= $ 2690

c) The accrual basis of accounting provides a better picture of a company\'s profits.

The reason is that the income statement prepared under the accrual basis will report all of the revenues actually earned during the period and all of the expenses incurred in order to earn the revenues and not all the expenses which is paid in cash.

Date	Account	Debit	Credit
July 1	Insurance expense	750
	Cash		750
4	Furniture	3500
	Cash		3500
5	Cash	1200
	Service revenue		1200
8	Advertisement expenses	200
	Cash		200
11	No Entry
19	No entry
24	Cash	3300
	Service revenue		3300
26	Computer	2500
	Cash		2500
29	Salary Expense	1500
	Cash		1500
31	No entry
31	No entry
31	Depreciation expense	260
	Fixed assets		260