In its first year of operations, Cope Company earned $28,000 in service revenue,

Question

In its first year of operations, Cope Company earned $28,000 in service revenue, $6,000 of which was on account and still outstanding at year-end. The remaining $22,000 was received in cash from customers.
The company incurred operating expenses of $15,500. Of these expenses $13,000 were paid in cash; $2,500 was still owed on account at year-end. In addition, Cope prepaid $2,600 for insurance coverage that would not be used until the second year of operations.

(a) Calculate the first year's net earnings under the cash basis of accounting, and calculate the first year's net earnings under the accrual basis of accounting.



Cash Basis $
Accrual Basis $

Explanation / Answer

cash basis of accounting: recognise only cash transactions service revenue $22000 - operating expenses $13000 - insurance $2600 = net earnings $ 6400 accrual basis of accounting: recognise transactions meant for only this year of operations service revenue $28000(all revenue earned, whether received or receivable) - operating expenses $15500 (all expenses incurred, whether paid or payable) = net earnings $12500 prepaid insurance $2600 is meant for the next period, so should not figure in the calculation of net earnings for this period.

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