Chapter 3, Problem E3.19E

Comparing cash and accrual basis accounting and applying the revenue recognition principle and the matching principle

Learning Objectives 1,2

Chef’s Catering completed the following selected transactions during May 2018:

May 1	Prepaid rent for three months, $2,400.
5	Received and paid electricity bill, $700.
9	Received cash for meals served to customers, $2,600.
14	Paid cash for kitchen equipment, $3,000.
23	Served a banquet on account, $2,800.
31	Made the adjusting entry for rent (from May 1).
31	Accrued salary expense, $1,600.
31	Recorded depreciation for May on kitchen equipment, $50.

Requirements

1. Show whether each transaction would be handled as a revenue or an expense using both the cash basis and accrual basis accounting systems by completing the following table. (Expenses should be shown in parentheses.) Also, indicate the dollar amount of the revenue or expense. The May 1 transaction has been completed as an example.
 

Amount of Revenue (Expense) for May
Date	Cash Basis Amount of Revenue (Expense)	Accrual Basis Amount of Revenue (Expense)
May 1	($2,400)	$0

After completing the table, calculate the amount of net income or net loss for Chefs Catering under the accrual basis and cash basis accounting systems for May.

Considering your results from Requirement 2, which method gives the best picture of the true earnings of Chef's Catering? Why?