Question

Explain how accrual accounting differs from cash-basis accounting; apply the revenue and expense recognition principles) During 2018, Able Network, Inc., which designs network servers, earned revenues of $820 million. Expenses totaled $520 million. Able collected all but $20 million of the revenues and paid $610 million on its expenses.
a. Under accrual accounting, what amount of revenue should Able report for 2018? How?
b. Under accrual accounting, what amount of total expense should Able report for 2018?
c. Redo parts a and b using the cash basis. Explain how the accrual basis differs from the does the revenue principle help to answer this question?
d. Which financial statement reports revenues and expenses? Which statement reports cash receipts and cash payments?

Answer 1

Answer:

In the accrual accounting system, revenue is recognized in the books once it is earned. This is when the service or goods has been delivered and acknowledged by the customer. Expenses are recorded in the period incurred under this system of account.

Under cash basis accounting, revenue is only recognized when cash has been received. Expenses are also recognized when cash is paid.

a. Revenue to be reported is $820 million.

Debit Cash $800 million

Debit Accounts receivable $20 million

Credit Revenue $820 million

b. $520 million

c. Using cash basis, Revenue to be reported is $800 million

Debit Cash $800 million

Credit Revenue $800 million

Total expense will be $610, the amount paid.

The accrual basis would record a revenue that is $20 million  more than that  recognized on the cash basis knowing that the revenue principle requires that revenue be recognized once the goods have been delivered to the customer or the service has been rendered and acknowledged by the customer.

d. The income statement is the financial statement that reports revenue and expenses. while the balance sheet records cash receipt and cash payments.

Explanation:

Cash is an asset recognized in the balance sheet while revenue and expenses are recognized in the statement of profit or loss or income statement. Cash and accrual bases are 2 systems of recognizing transactions in the books. The major difference between them is about cash collection or payments.