Explanation Accrual basis of accounting: In accrual Basis of accounting, the company records all the transaction that brings changes in the financial statement of the company. In accrual basis of accounting, the revenue is recognized for the accounting period, in which the goods are sold, or the service performed even if cash is not exchanged. Similarly the expenses are recognized for the accounting period, in which the business incurred expenses even if cash is not exchanged. Following are the effects of each transaction under accrual basis of accounting: a. In this transaction, Incorporation B recognizes revenue using the accrual basis of revenue on July, as it performed its service to the customer. Hence, the amount of revenue earned is $12,000. Cash is an asset account. Thus, an increase in cash increases the asset account. Hence, debit cash account by $12,000. As this transaction affects the assets account and stockholder’s equity account, it will not affect the liability account . Service revenue is a component of stockholder’s equity account. Thus, an increase in service revenue increases the stockholder’s equity account. Hence, service revenue account is being credited to increase its balance by $12,000. b. In this transaction, Incorporation B recognizes revenue using the accrual basis of revenue on July , as it performed service for a party held on the last day of July. Hence, the amount of revenue earned is $250. Accounts receivable is an asset account. Thus, an increase in accounts receivable account increases the asset account. Hence, account receivable account is being debited to increase its balance by $250...

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ISBN: 9780078025914

Author: Fred Phillips Associate Professor, Robert Libby, Patricia Libby

Publisher: McGraw-Hill Education

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Chapter 3, Problem 3.6ME

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