91Ó°ÊÓ

Use pluses and minuses (or NA for not applicable) to show how the following events should be analyzed using the accounting equation under 1\. the cash basis of accounting and 2\. the accrual basis of accounting. a. signed a contract for the purchase of land. b. Paid a deposit on the land purchase. c. Received money in advance from a customer d. Listed land for sale with a local realtor e. Used equipment, such as a computer, in the business. f. Had a computer repaired; the repair person just leaves a bill, but cannot accept payment for the repair. g. Paid the repair bill. h. Provided services to customers who will not pay until next month. i. Received compliments from customers about excellent customer services. j. Hired a well-trained accountant to prepare financial statements and provide financial advice. (Assume no payments have been made.) k. Collected money from customers who have already been billed. 1\. Employees worked this month, but the payroll (payment) was delayed until the following month. m. Failed to pay suppliers for three months because there is not enough money in the bank. n. Received supplies from a vendor, along with a bill. o. Sold land under a contract for 10 future payments. p. Collected one of the contract payments from the land sale.

Step by step solution

01

- Analyze Each Event under Cash Basis Accounting

For each event, only record when cash is exchanged: \n a. NA\n b. decrease assets (cash), increase assets (land)\n c. increase assets (cash), increase liabilities (unearned revenue)\n d. NA\n e. NA\n f. NA\n g. decrease assets (cash), decrease liabilities (accounts payable)\n h. NA\n i. NA\n j. NA\n k. increase assets (cash), decrease liabilities (accounts receivable)\n l. NA\n m. NA\n n. NA\n o. NA\n p. increase assets (cash), decrease liabilities (contract liability)

02

- Analyze Each Event under Accrual Basis Accounting

In this case, record the events when they are incurred or earned, not when the cash transaction happens: \n a. no change in the equation\n b. decrease assets (cash), increase assets (land)\n c. increase assets (cash), increase liabilities (unearned revenue)\n d. no change in the equation\n e. increase expenses, decrease assets (equipment)\n f. increase expenses, increase liabilities\n g. decrease assets (cash), decrease liabilities\n h. increase assets (accounts receivable), increase revenue\n i. no change in the equation\n j. increase assets (salary payable), increase expenses\n k. increase assets (cash), decrease assets (accounts receivable)\n l. increase expenses, increase liabilities (wages payable)\n m. increase liabilities (accounts payable), decrease assets (supplies)\n n. increase assets (supplies), increase liabilities (accounts payable)\n o. increase assets (notes receivable), increase revenue\n p. increase assets (cash), decrease assets (notes receivable)

03

- Understand The Differences Between The Two Accounting Methods

The differences between the two methods can be seen; a transaction may be recognized at different times under each method. This influences the financial results that are reported in each accounting period.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cash Basis Accounting

In cash basis accounting, transactions are only recorded when cash changes hands. This means:

• Revenue is documented when cash is received, not when it's earned.
• Expenses are recorded when they're paid, not when they're incurred.

Consider the exercise examples: when signing a contract for land purchase, no cash changes hands, thus it's marked as "NA". However, when a payment is made for this land or when a customer pays in advance, these are recorded because they involve the exchange of cash.
Cash basis is simple and often used by small businesses due to its straightforwardness. However, it doesn't always provide a complete picture of financial health.

Accrual Basis Accounting

Accrual basis accounting records financial transactions as they occur, regardless of when cash is exchanged. It provides a more accurate picture of an entity's economic activity and financial health.
The key points include:

• Revenues are recognized when earned, regardless of when the cash is received.
• Expenses are recorded when incurred, even if the payment is made later.

In the exercise, items like receiving goods on credit or earning revenue from services performed (but not yet paid for) are recorded, reflecting a more comprehensive view of commitments and income. This method is used by most companies because it aligns with Generally Accepted Accounting Principles (GAAP).

Assets and Liabilities

Assets are resources owned by a business that are expected to bring future economic benefit, while liabilities are financial obligations the business has to others.
In analyzing transactions, it’s crucial to identify their impact on assets and liabilities:

• Buying land affects assets, increasing land value, and potentially decreasing cash.
• A customer's advance payment increases cash, but also creates a liability as "unearned revenue."

Understanding the interplay between assets and liabilities helps in assessing a company’s financial position. This was depicted in the exercise steps, highlighting how transactions affect these two key balance sheet components.

Financial Transaction Analysis

Analyzing financial transactions involves understanding their impact on the accounting equation, which is expressed as: \[ \text{Assets} = \text{Liabilities} + \text{Equity} \] Each transaction alters this equation in some way. Here's how some typical transactions work:

• A payment received affects cash (asset) and unearned revenue (liability).
• Purchasing equipment influences both assets and possibly liabilities, depending on payment terms.

The exercise splits these between cash and accrual methods, showing how each method records transactions differently. This analysis is fundamental in ensuring that financial statements are accurate and reflect true business activity.