Question

Employees performed services in 2016, but got paid in 2017. Apply the matching concept to this example. In which year would the wage expense be reported on the income statement under [a] the cash basis or [b] the accrual basis? Why?

Answer 1

Answer:

a) Cash basis - 2017

b) Accrual basis - 2016

Explanation:

Requirement a)

The wage expense would be reported in 2017 on the income statement under the cash basis. According to the cash basis accounting, the expenses have occurred only when the cash is paid. Therefore, whatever the employees did in 2016 would not be reported as an expense if they did not get the payment in 2016. Managers cannot apply the matching principle in Cash basis accounting.

Requirement b)

The wage expense would be reported in 2016 on the income statement under the cash basis. It matches with the matching principle. It is a matching concept example. According to the accrual basis accounting, the expenses would be reported whenever the employees performed for the company regardless of getting paid on that year or not.