Practice Question
A local company has a cash basis accounting system. They received $20,000 for services provided but had incurred $5,000 in expenses that will be paid next year. How would this affect their net income for the current year?
Answer +
Final Answer: $20,000
Explanation +
Step 1: Under cash basis accounting, revenue is recognized when cash is received. Since the company received $20,000, this is recognized as income.
Step 2: Expenses are recognized only when cash is paid. The $5,000 incurred but unpaid expense will not be recorded until the next year.
Conclusion: Since no cash was paid for the $5,000 expense, it does not affect this year’s net income. Therefore, the net income for the current year is $20,000.