Chapter 3: 19E_3 (page 162)

Question :Chef ’s Catering completed the following selected transactions during May 2018: Learning Objectives 1, 2 Learning Objectives 1, 2 > Exercises May 1 Prepaid rent for three months, $2,400. 5 Received and paid electricity bill, $700. 9 Received cash for meals served to customers, $2,600. 14 Paid cash for kitchen equipment, $3,000. 23 Served a banquet on account, $2,800. 31 Made the adjusting entry for rent (from May 1). 31 Accrued salary expense, $1,600. 31 Recorded depreciation for May on kitchen equipment, $50. Date May 1 $(2,400) $0 Cash Basis Amount of Revenue (Expense) Accrual Basis Amount of Revenue (Expense) Amount of Revenue (Expense) for May Requirements 1. Show whether each transaction would be handled as a revenue or an expense using both the cash basis and accrual basis accounting systems by completing the following table. (Expenses should be shown in parentheses.) Also, indicate the dollar amount of the revenue or expense. The May 1 transaction has been completed as an example. 2. After completing the table, calculate the amount of net income or net loss for Chef ’s Catering under the accrual basis and cash basis accounting systems for May. 3. Considering your results from Requirement 2, which method gives the best picture of the true earnings of Chef ’s Catering? Why?

Short Answer

Expert verified

Accrual basis of accounting reports best picture, as it correctly reports the revenues and expenses for the period.

Step by step solution

Step-by-Step-SolutionStep 1: Explanation on Accrual Basis Accounting

Accrual basis of accounting records the revenues and expenses on the basis of earned or incurred.

Comaprison of Both Methods

As cash basis accounting only reports revenues and expenses on the cash basis, it fails to record accrued revenues and expenses which are incurred in the business, hence, it does not not report revenues and expenses correctly.

Also in case of kitchen equipment purchased, total amount is expensed under cash basis, however this is not the correct treatment, as depreciation expense is required to record for this type of asset.