PROBLEM: Accrual Accounting

Question

DEF Corporation’s net income under cash basis is 2,225,000. The only discrepancy if it will be compared with accrual basis is the accrued expenses. The accrued expenses are as follows:

Accrued expenses as of December 31,2011

Accrued wages, payment made on January 5,2012
125,000

Prepaid rent, remaining 6 months
180,000

Utilities payable, paid on January 5,2012
35,000

How much is the net income if the accrual method of accounting was used?

Answer 1

Accrual means that you record the expense when incurred and not when paid.  In this case, you would calculate as follows:

 

2,225,000.00
(125,000.00)
(30,000.00) -- one month of expense has expired, the remaining stays on the balance sheet in prepaids
(35,000.00)
2,035,000.00

 

 

Hope this helps!