Textbook Problem

How does accural-basis net income differ from cash-basis net income?

To determine

Concept Introduction:

Accounting is an art of recording, classifying, analyzing and summarizing the financial statement to produce meaningful information and reports.

Accounting is done with two methods as follows:

Cash Basis accounting: Under the cash basis accounting all the cash receipts for the period are considered as revenue and all the cash payments for the period are considered as expenses and net income us calculated.

Accrual Basis accounting: Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.

To indicate:

The difference between the Cash basis net income and accrual basis net income.

Answer to Problem 1DQ

The difference between the Cash basis net income and accrual basis net income is as follows:

Under the cash basis accounting the net income is calculated using cash receipts and cash payments whereas under the accrual basis of accounting, the net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.

Explanation of Solution

Accounting is an art of recording, classifying, analyzing and summarizing the financial statement to produce meaningful information and reports.

Accounting is done with two methods as follows:

Cash Basis accounting: Under the cash basis accounting all the cash receipts for the period are considered as revenue and all the cash payments for the period are considered as expenses and net income us calculated.

Accrual Basis accounting: Under the accrual basis, the revenue and expenses are recorded accreting to their accrual for the given period and cash receipts and payments are not considered to decide their accrual. The net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.

The difference between the Cash basis net income and accrual basis net income is as follows:

Under the cash basis accounting the net income is calculated using cash receipts and cash payments whereas under the accrual basis of accounting, the net income is calculated using the accrued revenue and accrued expenses belonging to the particular period.