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.
