Question

Notate which of the following are either cash fro or accrual basis of accounting 1. purchased an auto part worth 1k and paid 300. Business records only 300 as the expense 2. paid 250 for prepaid telephone expenses over the next month. Business records it in the current month 3. Purchased an auto part worth 1k and paid 300. Business records 1K as the expense 4. paid 250 for prepaid telephone expenses over the next month. Business records it in the next month

Answer 1

• General Concept:

Cash basis: Revenues and expenses are recorded ONLY when they are earned in Cash or paid in Cash, respectively.

Accrual Basis: Revenues are recorded when they are earned, and expenses are recorded when they are incurred, whether CASH HAS BEEN PAID OR NOT.

• Answers

#1: Only $300 has been recorded as expense while $1000 were incurred. This means its recorded as CASH BASIS.

#2: $250 paid for next month, recorded this month = Cash BASIS, because its an expense of next month and if accrual method was followed it would be recorded as expense next month.

#3: Whole $ 1000 has been recorded as expense while only $300 was paid in Cash. This shows that expense is recorded on ACCRUAL BASIS.

#4: $250 paid for next months, recorded next month = Accrual Basis