Question

When converting from cash-basis to accrual-basis accounting, which of the following adjustments should be made to cash receipts from customers to determine accrual-basis service revenue? (A) Subtract ending accounts receivable. (B) Subtract beginning unearned service revenue. (C) Add ending accounts receivable. (D) Add cash sales.

Answer 1

Answer: (B) Subtract beginning unearned service revenue.

Explanation: The difference between cash-basis and accrual-basis accounting is the timing of when revenue and expenses are recognised. While cash-basis accounting recognises revenue when actual cash is received or when cash is paid for expenses, accrual-basis accounting recognises revenue when it is earned and when expenses are incurred.

To treat cash receipt from customers on service revenue using accrual-basis accounting, the cash receipt would be warehoused in unearned service revenue account, when the service is rendered or depending on the timing of the service (how long the service takes), the unearned service revenue would be unwound to revenue.