Question

In its first year of operations, Crane Company recognized $31,700 in service revenue, $7,700 of which was on account and still outstanding at year-end. The remaining $24,000 was received in cash from customers. The company incurred operating expenses of $16,600. Of these expenses, $12,690 were paid in cash; $3,910 was still owed on account at year-end. In addition, Crane prepaid $3,260 for insurance coverage that would not be used until the second year of operations.

Required:
Calcuate the first year's net earnings under the cash basis of accounting, and calculate the first years net earnings under the accrual basis of accouriting.

Answer 1

Under the cash basis, expenses and revenue are recorded in the period the cash is received or spent.

Under the Accrual basis, expenses and revenue are recorded in the period incurred.

Under Cash basis:

= Cash Revenue - cash expenses - Prepaid expenses

= 24,000 - 12,690 - 3,260

= $8,050

Under Accrual basis:

= Revenue for the year - Expenses for the year

= 31,700 - 16,600

= $15,700