Question

Dark Room is a business servicing film photographers. In November 2020, Dark Room will be paying $12,000 to cover six months of various expenses between November 1, 2020 and April 30, 2021 and receiving $18,000 from a client for services to be delivered over the following twelve months between November 1, 2020 and October 31, 2021.

Assume various expenses are incurred and services provided evenly across the six and twelve months, respectively.

Required:

Calculate the monthly expenses, service revenue and profit/loss of Dark Room for the months of November 2020 and December 2020 under both cash and accrual accounting using the table below. Ignore GST.

	Cash accounting		Accrual accounting
	November 2020	December 2020	November 2020	December 2020
Service revenue
Various expenses
Profit/loss

Which accounting method (cash or accrual accounting) is more accurate in recording accounting transactions and why?

Answer 1

	Cash accounting		Accrual accounting
	Nov-20	Dec-20	Nov-20	Dec-20
Service revenue	$18,000	$      -	$18,000/12 = $1,500	$18,000/12 = $1,500
Various expenses	$12,000	$      -	$12,000/6 = $2,000	$12,000/6 = $2,000
Profit/loss	$ 6,000	$      -	$                      (500)	$                      (500)

Accrual method will show more accurate values. it will consider income and expenses accrued during the period