Question

Explain how accrual accounting differs from cash basis accounting if:A. Prepaid insurance beginning $400B. Payments for insurance during the period $1,200C. Prepaid insurance ending $700

Answer 1

Answer:

Difference between accrual accounting and cash basis accounting:

The insurance expense for the period will be $900 under the accrual accounting basis.  But with the cash basis of accounting, the insurance expense for the period will be $1,200 being the amount of insurance paid during the period.

Explanation:

a) Data:

A. Prepaid insurance beginning $400

B. Payments for insurance during the period $1,200

C. Prepaid insurance ending $700

With accrual basis, the insurance prepaid of $400 at the beginning will be accounted as expense in the current year when the services are consumed.  The amount would be debited to the Prepaid Insurance account as a current asset.  The payments for insurance during the period of $1,200 are also added to the beginning prepayment.  Then the prepaid insurance ending of $700 is deducted (credited) to the insurance account to arrive at the insurance expense for the period.

The cash basis accounting will charge the sum of $1,200 as the insurance expense for the period with no regard for the beginning and ending balances of prepayments.