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Cash Basis and Accrual Basis of Accounting

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What is the difference between the cash basis of accounting and the accrual basis of accounting? Which one would you select for a company that has inventory and why? Does the size of the company make a difference? Explain how. What would be the advantages and disadvantages of using one basis of accounting over the other?

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What is the difference between the cash basis of accounting and the accrual basis of accounting?

The main difference resides in the recording of income and expenses. Under the accrual basis, income is realized when earned regardless of when it is collected, and expenses are realized as they are incurred and not when they are paid. Under the cash basis, income is realized when it is received, and expenses are realized as they are actually paid.

Which one would you select for a company that has inventory and why? ...

Solution Summary

This solution discusses the differences between cash and accrual accounting. The best method for inventory is discussed, and other factors that include company size, advantages and disadvantages of each method are also discussed.

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What is the difference between accrual-basis accounting and cash-basis accounting?

E2-1 On numerous occasions, proposals have surfaced to put the federal government on the accrual basis of accounting. This is no small issue. If this basis were used, it would mean that billions in unrecorded liabilities would have to be booked, and the federal deficit would increase substantially.

Instructions
(a) What is the difference between accrual-basis accounting and cash-basis accounting?
(b) Why would politicians prefer the cash basis over the accrual basis?
(c) Write a letter to your senator explaining why the federal government should adopt the
accrual basis of accounting.

E2-4 Karen Tong, D.D.S., opened a dental practice on January 1, 2002. During the first month of operations the following transactions occurred.
1. Performed services for patients who had dental plan insurance. At January 31, $875 of such services was earned but not yet billed to the insurance companies.
2. Utility expenses incurred but not paid prior to January 31 totaled $520.
3. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000, 3-year note payable. The equipment depreciates $400 per month. Interest is $500 per month.
4. Purchased a one-year malpractice insurance policy on January 1 for $12,000.
5. Purchased $1,600 of dental supplies. On January 31, determined that $700 of supplies were on hand.

Instructions
Prepare the adjusting entries on January 31. Account titles are: Accumulated Depreciation?Dental Equipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expense, and Utilities Payable.

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