Question

Safe Home provides house-sitting for people while they are away on vacation. Some of its customers pay immediately after the job is finished. Some customers ask that the business send them a bill. As of the end of the year, Safe Home has collected $1,360 from cash-paying customers. Safe Home’s remaining customers owe the business $660. Safe Home recorded $1,360 of service revenue for the year. Cash basis If Safe Home had recorded their service revenue using the other method, how much service revenue would they have recorded for the year?

Answer 1

Under the accrual method of accounting, revenues are recognized when the revenue generating activity actually occurs, and not necessarily when the company receives the money. Under accrual accounting, total revenue = $1,360 (already collected) + $660 (accounts receivable) = $2,020.

E.g. Company X sells $10,000 worth of goods on account to company Y, the journal entry would be:

Dr Accounts receivable 10,000

Cr Sales revenue 10,000

Dr Cost of goods sold XX

Cr Inventory XX

After the company collects the accounts receivable, the journal entry would be:

Dr Cash 10,000

Cr Accounts receivable 10,000