Cash basis accounting-revenue and expenses are recorded when cash changes hands.

Accrual basis accounting –US GAAP

Revenue is recorded when earned and expenses are recorded when incurred.

That means that if you sell something on account you would record a journal entry at the time the sale took place.

Debit Accounts Receivable

Credit Sales

If you use the cash basis of accounting No entry would be made.

So when you collect the cash (another economic event) you would

Debit Cash

Credit Accounts Receivable

PREPAIDS:

1. They are assets
2. Recorded on the balance sheet
3. The prepaid is set up when you pay for something inadvance.
4. It is expensed over time as the benefit is beingconsumed or the expense is being incurred.
5. Common Examples are prepaid insurance and prepaidrent.

RECORDED:

When purchased:

Debit Prepaid Insurance

Credit Cash

When incurred:

Debit Insurance Expense

Credit Prepaid Insurance

For example you buy an insurance policy on June 1 2018 for 24 months at a cost of $24,000

Record the entry to buy the insurance and then record the entry on December 31, 2018.

June 1, 2018

Debit Prepaid Insurance 24,000

Credit Cash 24,000

December 31, 2018

Debit Insurance Expense 6,000

Credit Prepaid Insurance 6,000

Why is the answer $6,000? Hint: look at the dates.

UNEARNED REVENUE:

1. It happens when you receive money in advance for services or product delivery that is not yet performed.
2. You have not earned it yet.
3. It is a liability and is recorded on the balance sheet

Entry when money is received:

Debit Cash

Credit Unearned Revenue

Entry when services are performed:

Debit Unearned Revenue

Credit Revenue

Example you have a business that designs web pages for companies. You receive $ 10,000 in advance on January 15, 2018 to design a web page. The customer expects that you will completed with the web page on March 15, 2018

Make the entries:

Entry when money is received: January 15,2018

Debit Cash 10,000

Credit Unearned Revenue 10,000

Entry when services are performed: March 15,20180

Debit Unearned Revenue 10,000

Credit Revenue 10,000

YOUR TASK:

1. Determine the sales and net income under cash basis and accrual-basis accounting using the following information:
2. January 1 2018 You open a bank account to start your new company that makes web design pages in the amount of $50,000
3. On January 2, 2018, you buy a computer in cash for$2,000
4. On January 5, 2018, you buy a printer and cell phone on credit for $100 and $1,500 respectively. The terms are net 90 days.
5. January 5, 2018, you rent a small location at a web convention site for 3 months to demonstrate your business. You will start these demonstrations in June 2018.

Answer rating: 100% (QA)

Cash Basis Accounting Sales No sales are recorded under cash basis accounting as there were no cash ... View the full answer