Page 34 - ISCDEBK-XI

Bases of Accounting 5.3
Example. From the following information, determine the profit earned or loss incurred when
(i) Cash Basis of Accounting and (ii) Accrual Basis of Accounting are followed:
`
Cash Sales 5,00,000
Credit Sales 2,00,000
Outstanding Salary and Wages 4,000
Insurance Paid in Advance 2,500
Outstanding Electricity Expenses 1,000
Income Received (excluding income received in advance) 5,000
Income Received in Advance 1,000
Income Earned but not Received 3,000
Cash Purchases 2,75,000
Credit Purchases 1,25,000
Salary and Wages Paid 44,000
Electricity Expenses Paid 11,000
Insurance Expenses Paid (including prepaid) 10,000
Solution:
(i) When Cash Basis of Accounting is followed:
`
Cash Sales 5,00,000
Add: Income Received 5,000
Income Received in Advance 1,000 6,000
5,06,000
Less: Cash Purchases 2,75,000
Salary and Wages Paid 44,000
Electricity Expenses Paid 11,000
Insurance Expenses Paid 10,000 3,40,000
Profit 1,66,000
(ii) When Accrual Basis of Accounting is followed:
`
Sales (Cash + Credit) 7,00,000
Add: Income Earned (Income Received
+ Income Earned but not Received
(` 5,000 + ` 3,000)) 8,000
7,08,000
Less: Purchases (Cash + Credit) (` 2,75,000 + ` 1,25,000) 4,00,000
Salary and Wages (Paid + Outstanding) 48,000
(` 44,000 + ` 4,000)
Electricity Expenses (` 11,000 + ` 1,000) 12,000
Insurance Expenses (Paid less prepaid) (` 10,000 – ` 2,500) 7,500 4,67,500
Profit 2,40,500