1. Explain what are the differences if accrual or cash accounting is used to account for the following hypothetical situation (explain theconcept using the matching principle and illustrate with numbers each accounting treatment): Marie went to City Hall to pay for thefollowing: Booth Permit ($40.00), Cleaning deposit ($200.00) which refundable after the booth area is clean, City of Montreal HealthInspection fee ($150.00), and the Water, Drain, and Electricity connections and dismantle after the event ($200.00).

Accrual Accounting:Recognition of Revenue: Under accrual accounting, revenue is recognized when it…

Answered: 1. Explain what are the differences if…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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1. Explain what are the differences if accrual or cash accounting is used to account for the following hypothetical situation (explain the
concept using the matching principle and illustrate with numbers each accounting treatment): Marie went to City Hall to pay for the
following: Booth Permit ($40.00), Cleaning deposit ($200.00) which refundable after the booth area is clean, City of Montreal Health
Inspection fee ($150.00), and the Water, Drain, and Electricity connections and dismantle after the event ($200.00).

Expert Solution

Step 1: Introduction to the question:

Accrual Accounting:

Recognition of Revenue: Under accrual accounting, revenue is recognized when it is earned, not necessarily when the cash is received. This means that if a company provides goods or services, and the customer agrees to pay later, the revenue is recorded when the sale is made, regardless of when the payment is received.
Recognition of Expenses: Expenses are recognized when they are incurred, regardless of when the actual payment is made. For example, if a company receives a service, it records the expense when it receives the service, not necessarily when it pays the bill.

Cash Accounting:

Recognition of Revenue: Cash accounting,recognizes revenue only when cash is received. This means that revenue is recorded when the money is actually received, regardless of when the sale or service was provided.
Recognition of Expenses: Expenses are recognized when the cash is paid out. So, if a company incurs an expense but hasn't paid for it yet, it's not recognized as an expense until the payment is made.

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