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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Business

Keith Joyce

28 February, 18:34

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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Deacon Dyer · Answer 1

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