In its first year of operations, Harden Co. earned $39,000 in revenues and received $33,000 cash from these cu

Question

In its first year of operations, Harden Co. earned $39,000 in revenues and received $33,000 cash from these customers. The company incurred expenses of $22,500 but had not paid $2,250 of them at year-end. Harden also prepaid $3,750 cash for expenses that would be incurred the next year. Calculate the first year’s net income under both the cash basis and the accrual basis of accounting.

Answer 1

Under the cash basis you care only for what's received and paid :
Received $33,000 from customers
less -
Paid $20,250 expenses
Paid $3,750 meant for next year

Net income is $9,000

Under the accrual basis:
Revenue earned $39,000
less -
Expenses $22,500

Net income is $16,500

Under the accrual basis, you have to take into account everything earned or incurred, whether received or not, whether paid or not. The prepayment of $3,750 doesn't figure in this year's net income since it's meant for next year. This is what's meant by the matching concept. You have to match the expense to the revenue but you also have to match revenues and expenses to the correct period.

Answer 2

Do your OWN homework.

Answer 3

$48,000