Question

Question 4

Academic Consultants Inc. had the following selected transactions in August 2016:

Aug.	1	Prepaid insurance for August through December, $1,000
	4	Purchased software for cash, $800
	5	Performed service and received cash, $900
	8	Paid advertising expense, $300
	11	Performed service on account, $3,000
	19	Purchased computer on account, $1,600
	24	Collected for the August 11 service
	26	Paid account payable from August 19
	29	Paid salary expense, $900
	31	Adjusted for August insurance expense (see Aug 1)
	31	Earned revenue of $800 that was collected in advance in July

1.    Show how each transaction would be handled using the cash basis and the accrual basis.

Under each column, give the amount of revenue or expense for August. Journal entries are not required. Use the following format for your answer and show your computations.

Academic Consultants Inc.
Amount of Revenue (Expense) for August 2016
Date		Cash Basis		Accrual Basis
Aug	1	Revenue/(Expense)	Amount	Revenue/(Expense)	Amount

2.    Compute August income (loss) before tax under each accounting method.
3.    Explain which measure of net income or net loss is preferable.

Answer 1

Answer:

Computation of  August income (loss) before tax under each accounting method.

Cash Basis Accrual Basis

		Revenue/(Expenses) ( Amount in $)	Revenue/(Expenses) ( Amount in $ )
	Revenue	3900	6800
	Insurance	(1000)	(200)
	Salary	(900)	(900)
	Accrued wages	(0)	(0)
	Advertising expense	(300)	(300)
	Income Before Tax	1,700	5,400

  

Accrual basis of accounting is acceptable and preferable as per accounting , gaap and IFRS standards