Question

The Blue Hydrangea Law Firm prepays for advertising in the local newspaper. On January​ 1, the law firm paid $ 7 comma 700 for seven months of advertising. How much advertising expense should Blue Hydrangea Law Firm record for the two months ending February 28 under the a. cash​ basis?

Answer 1

Answer:

$7,700

Explanation:

There are two basis of accounting. These are the cash and accrual basis. In the cash basis of accounting, expenses are full recognized only when cash has been paid.

Hence unlike in the accrual basis where the payment or non payment results in the recognition of the expense once it has been incurred (and a corresponding asset or liability in form of prepayments and accrued expense), expenses under the cash basis of account would always result in a debit to expense and a credit to cash.

As such, if On January​ 1, the law firm paid $ 7 comma 700 for seven months of advertising, this will be recognized as the expense for the two months ending February 28 under the cash basis.