Question

Waterway Company had the following transactions during 2018: Sales of $4600 on account Collected $2200 for services to be performed in 2019 Paid $1600 cash in salaries Purchased airline tickets for $230 in December for a trip to take place in 2019 What is Waterway’s 2018 net income using accrual accounting-basis after accrual?

Answer 1

Answer:

$3,000

Explanation:

Under the accrual accounting basis, revenue is recognized once the conditions for recognition have been met. This is when the goods have been transferred or the service has been rendered.

Similarly for cost, it is recognized once it is incurred and not necessarily when cash is paid.

Sales of $4600 on account - This will be recognized as revenue

Collected $2200 for services to be performed in 2019 - This is deferred revenue as the service is yet to be rendered.

Paid $1600 cash in salaries - This expense has been incurred.

Purchased airline tickets for $230 in December for a trip to take place in 2019 - This is a prepayment and not yet an expense in p/l.

Net income = sales - expense

= $4600 - $1600

= $3,000

Waterway’s 2018 net income using accrual accounting-basis after accrual is $3,000.