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P3 10

The document compares cash basis and accrual basis accounting. It provides examples of general journal entries and financial statements under each method. The cash basis method is inconsistent with accounting theory as it ignores assets, liabilities and revenues that are created before cash changes hands.

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Nam Nguyen
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69 views2 pages

P3 10

The document compares cash basis and accrual basis accounting. It provides examples of general journal entries and financial statements under each method. The cash basis method is inconsistent with accounting theory as it ignores assets, liabilities and revenues that are created before cash changes hands.

Uploaded by

Nam Nguyen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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P3-10

Cash Basis Accrual Basis


General Journal General Journal
Date Accounts Title Debit Credit Date Accounts Title Debit Credit
1) Prepaid rent 6,000 1) Prepaid rent expense 6,000
Cash 6,000 Cash 6,000
2) Inventory 82,500 2) Inventory 82,500
Cash 82,500 Cash 82,500
3) Salaries expense 9,600 3) Salaries expense 12,600
Cash 9,600 Cash 9,600
Salaries payable 3,000
4) Cash 75,000 4) Cash 75,000
Sales revenue 75,000 Accounts receivable 23,400
Sales revenue 98,400
Cost of goods sold 59,500
Inventory 59,500
5) Operating expenses 8,400 5) Operating expenses 10,400
Cash 8,400 Cash 8,400
Accounts Payable 2,000

Manchester U.K Manchester U.K


Income statement Income statement
31-Jan-15 31-Jan-15
Revenues Revenues
Sales revenue 75,000 Sales revenue 98,400

Expenses Expenses
Prepaid rent expense 6,000 Rent expense 2,000
Purchase equipment 82,500 Cost of goods sold 59,500
Salaries expense 9600 Salaries expense 12,600
Operating expenses 8,400 Operating expenses 10,400
Totals expenses 106,500 Totals expenses 84,500

Net loss (31,500) Net income 13,900


Manchester U.K Manchester U.K
Balance sheet (Cash basis) Balance sheet (Accrual basis)
31-Jan-15 31-Jan-15

Assets Assets
Prepaid rent Prepaid rent 4,000
Inventory Inventory 23,000
Accounts receivable Accounts receivable 23,400
Cash 58,500 Cash 58,500
Total assets 58,500 Total assets 108,900

Liabilities and Owner's equity Liabilities and Owner's equity


Liabilities Liabilities
Owner's equity 58,500 Accounts payable 2,000
(90,000-31,500) Salaries payable 3,000
Total liabilities and equity 58,500 Owner's equity 103,900
(90,000+13,900)
Total liabilities and equity 108,900

The items in the cash basis that make this method inconsistent with the theory underlying the elements
of financial statements:
Prepaid rent ($4,000): it's a kind of assets as prepayment for renting office.
Accounts receivable ($23,400): the sales of inventory to customers in accounts receivable.
Inventory ($23,000): the outstanding inventory.
Salaries payable ($3,000): the amount not yet paid to employees at the end of period.
Accounts payable ($2,000): the amount not yet paid for operating expenses during period.

All of these items which are ignored by cash-basis accounting will make this method inconsistent with
the theory underlying the elements of financial statements.

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