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Cash Basis Versus Accrual Basis

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Heaven's Golf School completed the following transactions during January:

January
1. Prepaid insurance for January through March, $300
4. Performed service (gave golf lessons) on account, $2,200
5. Purchased equipment on account, $1,900
8. Paid property tax expense, $450
11. Purchased office equipment for cash, $800
19. Performed service and received cash, $700
24. Collected $400 on account.
26. Paid account payable from January 5.
29. Paid salary expense, $900
31. Recorded adjusting entry for January insurance expense (see Jan. 1)
31. Debited unearned revenue and credited revenue to adjust the accounts, $600.

Requirements
1. Show how each transaction would be handled using the accrual basis of accounting. Give the amount of revenue or expense for January. Journal entries are not required.

2. Compute January net income or net loss under the accrual basis of accounting.

3. State why the accrual basis of accounting is preferable to the cash basis.

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Solution Summary

This solution abstract is comprised of detailed information which explains of the difference between cash basis accounting and accrual basis accounting. The transactions is this posting show how they are handled using the accrual basis of accounting. Net income or net loss is also shown using the accrual basis. Included are reasons why the accrual basis of accounting is preferable to the cash basis.

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Note: The attached completed form shows how the problem posted is solved. Also, the form the student attached does not show other accounts (assets and liabilities) than revenue and expenses.

Transaction 1 would be recorded as a Prepaid Insurance (debit), which is an asset and cash (credit). Transaction 5 would be recorded as a Equipment (debit) which is an asset and Acct. Payable, (credit). Transaction 11 would be recorded as Office equipment (debit) an asset and Accounts Payable ...

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