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Accounting Principles: Cash vs Accrual; Deferred Revenue

1. What is the difference between cash basis and accrual basis accounting?

a. Why do accrual-basis financial statements provide more useful information than cash-basis financial statements?
b. Describe when each method (cash basis and accrual basis accounting) would be appropriate to use.

2.The Ritz Manor is a popular seaside resort. A double room costs $220 for one night. In order to reserve a room, guests must pay one night's stay in advance. On each floor of the hotel, Vendalite Company operates vending machines with energy bars, juices, and other snacks for guests. Vendalite stocks the machines and collects revenue every week. Total average weekly revenue from these machines is $720. The Ritz Manor is entitled to 30% of the revenue from the machines. Vendalite sends a check to the Ritz Manor once at the end of each quarter for the resort's share of the revenue.

a. Based on this information, what type of adjusting entries does the Ritz Manor have?
b. How are the amounts of these adjustments determined? Which accounts are affected?

Solution Preview

1. Cash basis accounting is the type of record-keeping which only reports cash transactions - both receipts and disbursements. Cash basis ignores any accounts receivable until received and any accounts payable until paid. The method is appropriate and reasonably representative of net income and expense for certain types of business. Service businesses of professionals, such as doctors and lawyers, usually also report on the cash basis.

The accrual basis includes entries to disclose amounts earned but not yet received, and expenses not yet paid. Many types of businesses should use the ...

Solution Summary

Accrual accounting versus cash is explained together with examples of types of businesses for which cash basis is the acceptable norm. The second question deals with how and when to properly record revenue in two situations. This solution is 392 words.