Question

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Melody’s Piano School operations for the month of May were limited to the following transactions:

•	Provided $650 of piano lessons to students who paid in cash.
•	Provided $500 of piano lessons on account.
•	Collected $375 from students who took piano lessons during April.
•	Paid April’s piano rental bill of $250.
•	Received May’s piano rental bill of $300 and set it aside for payment in June. What is Melody's Net Income for May using the accrual basis of accounting? $850 $375 $1,125 $775

Answer 1

· As per accrual system:
>revenues for a period to be recognised in a period in which they are earned, whether cash is received or not in that period.
>expenses for a period to be recognised in a period in which these are expensed, whether paid in cash or not.

· Accrued revenue = $ 650 cash revenue May + $ 500 on account revenue for May = $ 1150

· Accrued expenses = $ 300 rent for May

· Net Income = $ 1150 revenue - $ 300 expenses
= $ 850

· Correct Answer = Option #1: $ 850