Task: On September 1, 2013, Dr. Poppy billed one patient for $50,000. On October 1, 2013, she had received $35,000, with remaining $15,000 to be received in early 2014. Total expenses throughout 2013 were $40,000 with $5,000 of these costs not yet paid at December 31.
Find out income under both methods.
1. Under Cash-Based accounting how much goes in Cash Disbursements?
2. Under Accrual-Based Accounting, how much goes in Revenue Earned?
Cash-Base accounting Accrual-Based accounting
Cash Receipts $35,000 Revenue Earned ?
Cash Disbursements ? Expenses Incurred $40,000
Cash Basis Accounting
Under cash basis accounting, revenues and expenses are recognized as follows:
Revenue recognition: Revenue is recognized when cash is received.
Expense recognition: Expense is recognized when cash is paid.
Accrual Basis Accounting
Under the accrual basis accounting, expenses and revenues are recognized as follows:
Revenue recognition: Revenue is recognized when both of following situations are met:
a. Revenue is earned.
b. Revenue is realizable or realized.
Revenue is earned if products are delivered or services are provided.
Realized means cash is received.
Realizable means it is reasonable to anticipate that cash will be received in the prospect.
Expense recognition: Expense is recognized in period in which related revenue is recognized.