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2 January, 07:39

In its first year of operations, Roma Company reports the following. Earned revenues of $65,000 ($57,000 cash received from customers). Incurred expenses of $35,500 ($27,250 cash paid toward them). Prepaid $11,750 cash for costs that will not be expensed until next year. calculate the first year's net income under both the cash basis and the accrual basis of accounting.

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  1. 2 January, 07:51
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    Cash accounting $18,000

    Accrual accounting $37,750

    Explanation:

    Under the cash accounting, all the cash expense are deemed expenses other than payments to lenders and purchase of assets, and cash revenue as revenue. So this means:

    Cash revenue include $57,000 received from customers and cash expense includes $27,250 and prepared cash expense.

    So, under cash accounting:

    Revenue $57,000

    Expense ($27,250 + $11,750) ($39,000)

    Profit $18,000

    Under Accrual accounting system, the revenues are recorded when they are earned (not when received) and expenses are recorded when they are incurred (not when paid).

    Earned revenues are $65,000 and incurred expense are $35,500. Kindly note under accrual accounting, prepaid expenses are assets (not expenses).

    So, under accrual accounting:

    Revenue $65,000

    Expense ($27,250)

    Profit $37,750
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