Reference no: EM132642787

Question - Cash versus Accrual Basis of Accounting

At the end of the first year of operations, Jeremy Pereira, owner of Jubilee Designs, engaged you to prepare yearly financial statements for the year ended 30 June 2020, on both the cash basis and the accrual basis. The following data are a summary of selected transactions that occurred during the year. Ignore GST.

1. Fees of $325,000 were collected for services provided during the year.

2. There were $8,000 in accounts receivable at 30 June 2019 for services performed during June on credit.

3. Cash paid for salaries, rent, insurance and other expenses $195,000 during the year.

4. Salaries accrued for last fortnight of June $10,000, but not yet paid.

5. On 25 June 2020, a client paid $3,000 in advance for services to be rendered during July 2020.

6. Expenses of $9,000 were paid in advance for next financial year (not included in the above $195,000) at 30 June.

Required -

A. Calculate profit under the cash basis accounting.

B. Calculate profit under the accrual accounting.

C. Explain how the following items would be reported in the business's balance sheet (either current assets or current liabilities) under the accrual basis:

1. the $8,000 accounts receivable

2. the unpaid salaries of $10,000

3. the $3,000 advance received on 25 June 2020.

4. the cash payment of $9,000 for prepaid expenses.