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. Cash basis of accounting: Cash basis of accounting contradicts the accrual basis of accounting. In the cash basis of accounting, the business recognizes the revenues, only when they receive cash. Similarly, the business recognizes expenses, only when payments are made. To calculate: The net earnings for the Company R under the cash basis of accounting.

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Chapter 4, Problem 4.5E

(a)

To determine

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.

Cash basis of accounting:

Cash basis of accounting contradicts the accrual basis of accounting. In the cash basis of accounting, the business recognizes the revenues, only when they receive cash. Similarly, the business recognizes expenses, only when payments are made.

To calculate: The net earnings for the Company R under the cash basis of accounting.

(b)

To determine

To identify: Which basis of accounting (either cash or accrual) provides more useful information to the decision makers.

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