Question

Riya has always used the cash basis accounting method. Should Riya record the cash deposits on a cash basis or

accrual basis? Angel isn't experienced with accounting, and trusts Riya. However, if Riya records the $25,000 of
deposits on a cash basis, the income statement would show revenue and net income numbers, which would likely
affect the perceived value of the company, which means her sister might potentially over pay for Riya's half of the
business. If Riya records the deposits on an accrual basis, the income statement will not reflect the future revenue
that is contracted, but not performed yet. Should Riya record the revenue like she always has (on a cash basis), or
record it in line with her new knowledge about the accrual method? How should Riya handle this situation?

Answer 1

Riya should consider recording the cash deposits on an accrual basis, rather than her usual cash basis. This will provide a more accurate representation of the financial performance of the business.

Step-by-step explanation:

Riya should consider recording the cash deposits on an accrual basis, rather than her usual cash basis.

Recording the deposits on a cash basis would show revenue and net income numbers on the income statement, which could potentially affect the perceived value of the company and lead to overpayment for Riya's half of the business.

On the other hand, recording the deposits on an accrual basis would not reflect future revenue that is contracted but not yet performed.

By recording the revenue according to her new knowledge about the accrual method, Riya can provide a more accurate representation of the financial performance of the business.