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Briefly explain the difference between the cash basis of accounting and the accrual basis

Briefly explain the difference between the cash basis of accounting and the accrual basis of accounting. Are adjusting entries necessary under both methods?

Under the accrual basis of accounting, the accountant recognizes the impact of a business transaction on an entity when the transaction occurs, whether or not cash is received or paid. The accountant will record revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. Adjustments are usually necessary at the end of the period to update certain asset and liability accounts and to recognize revenues that have been earned but not collected and expenses that have been incurred but not paid.

63) Ed Ng is a friend of yours from university. After finishing high school he decided to open his own human resources consulting business rather than working for a large bureaucratic organization. He recently opened his business, and has contracted his services to a number of local retailers. He is paid a monthly fee for his services.

He has just received his first set of financial statements from his accountant. He is quite upset. The statements show a cash balance of $7,200 at the end of the month, but a net income of only $1,000. He has written you a letter, asking you whether such a situation is possible, or whether he should find another accountant.

Please explain to Ed what happened.

64) Barley & Hops Company was formed in 2011.  During the year the company had the following events occur:

1.The company issued $100,000 in common shares for cash.

2.The company purchased equipment for $15,000, paying $5,000 down and signing a 1-year, 8% note for the balance. 

3.The company hired 4 employees.

4.The company had sales of $250,000.  All sales were on account.

5.The company incurred the following expenses:  rent: $2,000, salaries: $20,000,  advertising $2,000 and utilities $4,000.  All expenses were paid in cash.

Required:Prepare the journal entries to record the above transactions.

65) Blitz Limited has recently hired a junior accountant.  The accountant noticed that his predecessor had made several mistakes in recording transactions during the most recent fiscal year. For each of the following situations, prepare the adjusting entry that should be made to correct the error.

1.Blitz received a $15,000 advance from a client for work that is going to be completed in the next year.  The bookkeeper debited cash and credited revenue.

2.Blitz purchased a new piece of equipment at a cost of $36,000. At the time of purchase, the equipment was debited to repairs and maintenance expense. The equipment is expected to have a useful life of 10 years.  Blitz uses straight-line depreciation.  Assume that the equipment had been in use for a full year.

3.During the year Blitz declared $5,000 in dividends.  The bookkeeper had recorded this payment as a debit to div


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Dec 07 2019 View more View Less

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