Question

Reliable Corporation provides computer consulting services to the local community and keeps its accounting records using cash-basis accounting. For the current year, cash was received from customers, $48,000, and cash salaries to employees were paid, $26,000. At the beginning of the year, customers owe Reliable $1,200. By the end of the year, customers owe $7,600. At the beginning of the year, Reliable owes employee salaries of $6,600. At the end of the year, Reliable owes employee salaries of $3,800. Determine cash-basis net income and accrual-basis net income for the current year.

Answer 1

Answer:

Net Income as per the Cash Basis Accounting $22,000

Net Income as per the Accrual Basis Accounting is $31,200

Explanation:

The cash basis accounting says that the net income is the cash left after the difference in the net cash inflow and cash outflow.

Mathematically,

Net Income By Using Cash Basis Accounting = Net Cash Inflow - Net Cash Outflow

Here

Net Cash Inflow is $48,000

Net Cash Outflow is $26,000

By putting values, we have:

Net Income By Using Cash Basis Accounting = $48,000 - $26,000

= $22,000

Now, when we are using accrual accounting then the first thing we should know is that whether the expense or income is related to the period or not. If the income is related to the period, then it must be included in the income and if it is not then it will be excluded. The same is with the expenses.

Accrual Income Computation:

Cash Received for the year is $48000 which will be included.

The receiveable amount of $1200 is for the previous period which means it will be excluded.

Furthermore, the receivable amount of $7600 includes $1200 of the previous month which means the difference ($6400) would be included.

This implies that

Accrual Income For The Period = $48000 + $6400 = $54,400

Now Accrual Expense Computation:

The cash salaries of $26000 paid to employees will be included.

The salaries payable of $6600 belongs to the previous period which means it must not be included.

The closing salaries payable is $3800 which means that the difference of opening and closing which is $2800, was paid against the previous month and hence must be deducted from the cash salaries for the period.

This implies that

Accrued Expense For The Period = $26000 - $2800 = $23200

Finally,

Net Accrued Income = $54,400 - $23,200 = $31,200