Question

List two types of transactions that would receive different accounting treatment using (a) strict cash-basis accounting, and

(b) a modified cash basis.

Answer 1

Strict cash-basis accounting recognizes transactions only when cash exchanges hands, while modified cash basis accounting recognizes certain transactions on an accrual basis. Examples of transactions that would receive different accounting treatment include purchases made on credit and revenues earned but not yet received in strict cash-basis accounting, and accrued expenses and accrued revenues in modified cash basis accounting.

Step-by-step explanation:

Strict cash-basis accounting recognizes transactions only when cash exchanges hands. Two types of transactions that would receive different accounting treatment using strict cash-basis accounting are:

1. Purchases made on credit: In strict cash-basis accounting, purchases made on credit are not recorded until the cash is paid. Therefore, these transactions would not be recognized until the cash is exchanged.
2. Revenues earned but not yet received: Strict cash-basis accounting does not recognize revenues until the cash is received. So, any revenue that has been earned but not yet received would not be recorded.

In modified cash basis accounting, certain transactions are recorded on an accrual basis instead of cash basis. Two types of transactions that would receive different accounting treatment using modified cash basis accounting are:

1. Accrued expenses: Modified cash basis accounting recognizes expenses when they are incurred, even if no cash is paid yet. So, any accrued expenses would be recorded in the period they are incurred.
2. Accrued revenues: Modified cash basis accounting recognizes revenues when they are earned, regardless of whether cash is received or not. Therefore, any accrued revenues would be recorded in the period they are earned.