Question

Sweet Catering completed the following selected transactions during May 2016:

May 1: Prepaid rent for three months, $2,400
May 5: Received and paid electricity bill, $60
May 9: Received cash for meals served to customers, $2,610
May 14: Paid cash for kitchen equipment, $3,880
May 23: Served a banquet on account, $2,050
May 31: Made the adjusting entry for rent (from May 1).
May 31: Accrued salary expense, $730
May 31: Recorded depreciation for May on kitchen equipment, $780

If Sweet Catering had recorded transactions using the Cash method, how much net income (loss) would they have recorded for the month of May? If there is a loss, enter it with parentheses or a negative sign.

Answer 1

If Sweet Catering had recorded transactions using the Cash method, the net loss recorded for the month of May would have ($3,730).

What is the cash basis of accounting?

The cash basis of accounting is the opposite of the accrual basis.  This accounting method records transactions based on the occurrence of cash receipts and payments.

On the other hand, the accrual basis takes into consideration all transactions that pertain to the period whether cash movements are involved or not.

Transaction Analysis:

May 1: Prepaid Rent $2,400 Cash $2,400

May 5: Electricity  $60 Cash $60

May 9: Cash $2,610 Sales Revenue $2,610

May 14: Kitchen equipment $3,880 Cash $3,880

May 23: Accounts Receivable $2,050 Sales Revenue $2,050

May 31: Rent Expense $800 Prepaid Rent $800

May 31: Salary expense $730 Salaries Payable $730

May 31: Depreciation Expense- kitchen equipment, $780 Accumulated Depreciation $780

Cash Accounting for net income (loss):

Cash Revenue $2,610

Kitchen equipment -3,880

Prepaid rent -2,400

Electricity -60

Net loss = $3,730

Thus, if Sweet Catering had recorded transactions using the Cash method, the net loss recorded for the month of May would have ($3,730).

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