3A-2 (Similar to problem 3A-1) KATIE CONSULTING, Inc. had the following transact

Question

3A-2 (Similar to problem 3A-1) KATIE CONSULTING, Inc. had the following transactions in March: March 2. Received S1,700 cash for consulting. March 7. Purchased advertising for $390 cash. March 11. Did additional consulting for $3,700 on account. March 19. Purchased furniture for $3,200 on account. March 22. Paid salaries for the month of $4,000 cash. March 25. Received $8,000 in advance for a job to begin April 6. March 28. Collected $700 of the money owed from March 11. Required l. For each transaction, indicate the entry that would be made under cash basis accounting and then under accrual basis accounting. What would be the net income or loss for the month using the two different approaches? 2. Write a note to your banker explaining why accrual basis accounting would be a fairer representation of the performance of your company then cash basis. You may use as an example the problem above or the example provided at the beginning of this chapter. hapter 3 Section A

Explanation / Answer

Requirement 1 Cash Basis Accrual Basis 2nd Cash 1700 Cash 1700 Revenue 1700 Revenue 1700 7th Advertising Expense 390 Advertising Expense 390 Cash 390 Cash 390 11th No Entry Accounts Receivable 3700 Revenue 3700 19th No Entry Furniture 3200 Accounts Payable 3200 22nd Salaries Expense 4000 Salaries Expense 4000 Cash 4000 Cash 4000 25th Cash 8000 Cash 8000 Revenue 8000 Unearned Revenue 8000 28th Cash 700 Cash 700 Revenue 700 Accounts Receivable 700 Net income Under Cash System Net Income Under Accrual System Revenue 10400 Revenue 5400 (1700+8000+700) (1700+3700) Expenses Expenses Advertising Expense 390 Advertising Expense 390 Salaries Expense 4000 4390 Salaries Expense 4000 4390 Net Income 6010 Net Income 1010 Requirement 2 Under acccrual system, all revenues and expenses are matched together. All revenues are recorded in the period when services and goods are performed and expenses are recognised when goods and services are purchased. So this method provides accurate recording of all transactions, like revenue, expense, assets and liabilities. So income statement as well as balance sheet prepared under this method shows correct position of company as regards to net income and assets and liabilities. But under cash nethod of accounting, revenues and expenses are recorded when cash is actually paid regardless of their occurance. So performance of services generating revenues will not match with recording of revenues and expenses. So this method doesn't give good snapshot of company's performance over a period of time

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