Comparing accrual and cash-basis accounting, preparing adjusting entries, and preparing income statements
Sweet Catering completed the following selected transactions during May, 2012:
1 4 6
4
| May 1 | Prepaid rent for three months, $1,500. |
| 5 | Paid electricity expenses, $400. |
| 9 | Received cash for meals served to customers, $2,600. |
| 14 | Paid cash for kitchen equipment, $2,400. |
| 23 | Served a banquet on account, $3,000. |
| 31 | Made the adjusting entry for rent (from May 1). |
| 31 | Accrued salary expense, $1,400. |
| 31 | Recorded depreciation for May on kitchen equipment, $40. |
4
Requirements
1. Prepare journal entries for each transaction.
2. Using the journal entries as a guide, show whether each transaction would be handled as a revenue or an expense using both the accrual and cash basis by completing the following table.
1
| Amount of Revenue (Expense) for May | ||
| Date | Cash Basis Amount of Revenue (Expense) | Accrual-Basis Amount of Revenue (Expense) |
3. After completing the table, calculate the amount of net income or net loss for Sweet Catering under the accrual and cash basis for May.
4. Considering your results from Requirement 3, which method gives the best picture of the true earnings of Sweet Catering? Why?
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