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Complete Exercise BE4-1. Complete Problems 4-2A & 4-3A. Answer the following: Commercial accounting and generally accepted accounting principles, generally prescribe the accrual basis of accounting over the cash basis. Describe both bases of accounting and explain the differences. Submit as either a Microsoft® Excel® or Microsoft® Word document. BE 4-1 use of $20 of the above supplies. (c) Made sales of $1,300, all on account. (d) Received $800 from customers in payment of their accounts. (e) Purchased equipment for cash, $2,500. (f) Recorded depreciation of building for period used, $600.

BE 4-1 Brief Exercises BE4-1 Transactions that affect earnings do not necessarily affect cash. Identify the effect, if any, that each of the following transactions would have upon cash and net income. The first transaction has been completed as an example.

Cash Net Income

• - $100 $0 (a) Purchased $100 of supplies for cash.
• $100 $0 (b) Recorded an adjusting entry to record use of $20 of the above supplies.
• $0 $1,300 (c) Made sales of $1,300, all on account.
• $800 $0 (d) Received $800 from customers in payment of their accounts.
• $2,500 $0 (e) Purchased equipment for cash, $2,500.
• $0 $600 (f) Recorded depreciation of building for period used, $600.

Paper For Above instruction

The core accounting principles and the distinction between cash basis and accrual basis accounting form the foundation of financial reporting and analysis. Understanding these methods is essential for accurate interpretation of a company's financial statements and for making informed business decisions. This paper will describe both accounting bases, discuss their differences, and analyze how specific transactions impact cash flow and net income, illustrating their practical implications.

Introduction

Accounting serves as the language of business, providing a systematic way to record, report, and analyze financial transactions. Among its fundamental concepts are the use of different accounting bases—primarily cash basis and accrual basis—which influence how financial information is captured and presented. These methods are governed by generally accepted accounting principles (GAAP), which favor the accrual basis for its accuracy and comparability. Understanding the differences between these bases and their effect on financial statements is vital for stakeholders, including managers, investors, and regulators.

Cash Basis of Accounting

The cash basis of accounting recognizes revenue and expenses only when cash is received or paid. This method is straightforward, easy to implement, and provides a clear picture of cash flow, making it appealing for small businesses and individual practitioners. Revenue is recorded when cash is received, and expenses are recorded when they are paid, regardless of when the goods or services were provided.

For example, if a company performs a service and receives payment immediately, the transaction is recorded as revenue at that moment. Conversely, expenses such as supplies purchased are recognized only when cash leaves the business. This simplicity often results in financial statements that are easy to prepare but can be misleading regarding the company's actual financial position and profitability, especially over periods spanning multiple accounting periods.

Accrual Basis of Accounting

The accrual basis recognizes revenues when earned and expenses when incurred, regardless of the timing of cash flows. This approach aligns with the matching principle, which aims to match revenues with the expenses incurred to generate them within the same accounting period. Consequently, the accrual basis provides a more accurate picture of a company's financial health and operational performance.

For instance, sales made on credit are recognized as revenue when the sale occurs, even if cash has not yet been received. Similarly, expenses such as supplies used are recorded when they are consumed, not necessarily when paid. This method often requires a more complex accounting system, including adjusting entries for accrued and deferred items, but it yields financial statements that better reflect the economic realities of a business.

Differences Between Cash and Accrual Accounting

The primary difference lies in the timing of recognizing income and expenses. Cash basis emphasizes cash flow, offering simplicity but lacking completeness of financial information. Accrual basis, on the other hand, emphasizes matching income with related expenses, providing a more comprehensive view of financial performance, albeit with more complexity.

For example, under cash basis, a sale made on credit is not recognized until the cash is received. Conversely, under accrual, the sale is recognized at the time of the transaction, regardless of payment. This difference can lead to significant discrepancies in net income and financial position reports, especially when receivables, payables, and accrued expenses are involved.

Practical Application: Analyzing Specific Transactions

Reviewing specific transactions helps illustrate how they affect cash and net income under both accounting methods:

• Purchased supplies for $100 cash: Both cash and accrual accounting recognize the cash outflow; expenses increase by $100, cash decreases by $100, and net income is unaffected immediately.
• Recording use of $20 supplies (adjusting entry): Under accrual accounting, expenses increase by $20, reducing net income; cash remains unchanged as the expense is recognized through an adjusting entry.
• Sales of $1,300 on account: Under accrual, revenue recognized increases net income by $1,300, with no immediate cash impact; cash flow remains unaffected until cash is received.
• Received $800 from customers: Under both methods, cash increases by $800; under accrual, receivables decrease accordingly, but net income remains unchanged.
• Purchased equipment for $2,500 cash: Cash decreases by $2,500; the purchase does not affect net income immediately but impacts the asset base.
• Depreciation of building for $600: Under accrual accounting, depreciation expense increases net income’s reduction by $600; cash flow is unaffected due to depreciation being a non-cash expense.

Conclusion

The choice between cash and accrual accounting has significant implications for a business’s financial reporting. While the cash basis is simpler and provides a snapshot of cash flow, it can distort profitability and financial position. The accrual basis, aligned with GAAP, offers a more accurate reflection of a company's economic activities, enabling stakeholders to make better-informed decisions. Proper understanding and application of these principles are essential for accurate financial analysis and compliance with accounting standards.

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