Total Paint Services earned $110,000 of service revenue during 2014. Of the $110
ID: 2449704 • Letter: T
Question
Total Paint Services earned $110,000 of service revenue during 2014. Of the $110,000 earned, the business received $84,000 in cash. The remaining amount, $26,000, was still owed by customers as of December 31. In addition, Total Paint Services incurred $82,000 of expenses during the year. As of December 31, $6,000 of the expenses still needed to be paid. In additional, Total Paint Services prepaid $2,000 cash in December 2014 for expenses incurred during the next year.
1. Determine the amount of service revenue and expenses for 2014 using a cash basis accounting system.
Explanation / Answer
Cash-basis accounting
In cash-basis accounting, companies record expenses in financial accounts when the cash is actually laid out, and they book revenue when they actually hold the cash in their hot little hands or, more likely, in a bank account. Smaller companies that haven't formally incorporated and most sole proprietors use cash-basis accounting because the system is easier for them to use on their own, meaning they don't have to hire a large accounting staff. It may not be related to that particular financial year. Recording transactions as and when inflow or outflow of cash occurs.
As per the cash-basis accounting system :
Cash Revenue during December 31, 2014 = $ 84,000
Cash Expenses during December 31, 2014 :
Total expenses = $ 82000
Less: Expenses not paid = $ 6,000
Actual Cash paid = $ 76,000
Add : Prepaid Cash = $2,000
Net Cash expenses = $ 78,000