Question

In its first year of operations, Harden Co. earned $39,000 in revenues and received $33,000 cash from these customers. The company incurred expenses of $22,500 but had not paid $2,250 of them at year-end. The company also prepaid $3,750 cash for expenses that would be incurred the next year. Calculate the first year’s net profit under both the cash basis and the accrual basis of accounting.

Answer for cash basis:

	Net Profit = Revenue - All Expense
	Revenue	33,000
	Expenses	24,000	(22500*90/100 + 22500)
	Net Profit	9,000

Hi, this is the answer for cash basis, however, may I know what is the rationale behind the calculation of expenses ($24,000)? Why do we need to multiply 90% of $22500?

Thank you!!

Answer 1

PLEASE LIKE THE ANSWER IF YOU FIND IT HELPFUL OR YOU CAN COMMENT IF YOU NEED CLARITY / EXPLANATION ON ANY POINT.