Sweet Catering completed the following selected transactions during May 2016:

Question

May 1: Prepaid rent for three months, $2,400
May 5: Received and paid electricity bill, $190
May 9: Received cash for meals served to customers, $2,390
May 14: Paid cash for kitchen equipment, $2,520
May 23: Served a banquet on account, $2,910
May 31: Made the adjusting entry for rent (from May 1).
May 31: Accrued salary expense, $1,140
May 31: Recorded depreciation for May on kitchen equipment, $410
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.
If Sweet Catering had recorded transactions using the Accrual 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

To calculate the net income (or loss) for Sweet Catering using both the Cash and Accrual methods, we will go through each method step by step.

Cash Method

Under the Cash method, revenue and expenses are recognized when cash is received or paid.

Revenues:

• Cash received for meals: $2,390
• Cash received for banquet on account: $0 (not recognized until cash is received)

Total Revenues: $2,390

Expenses:

• Electricity bill: $190 (paid)
• Kitchen equipment: $2,520 (paid)
• Prepaid rent: $0 (not recognized until paid month by month)
• Salaries accrued: $0 (not recognized as it has not been paid)

Total Expenses: $190 + $2,520 = $2,710

Net Income (Loss) - Cash Method:

Net Income = Total Revenues - Total Expenses
Net Income = $2,390 - $2,710 = -$320

Net Income (Loss) using Cash Method: ($320)

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Accrual Method

Under the Accrual method, revenues and expenses are recognized when they are earned or incurred, regardless of cash flow.

Revenues:

• Cash received for meals: $2,390
• Banquet served on account: $2,910 (earned, even though cash has not yet been received)

Total Revenues: $2,390 + $2,910 = $5,300

Expenses:

• Electricity bill: $190 (recognized as expense)
• Kitchen equipment: $0 (not considered an expense; instead, it's a capital expenditure)
• Rent: $800 (recognizing 1 month of rent out of the 3 months prepaid: $2,400 / 3)
• Accrued salaries: $1,140 (recognized even though cash has not been paid)
• Depreciation on equipment: $410 (recognized expense)

Total Expenses: $190 + $800 + $1,140 + $410 = $2,540

Net Income (Loss) - Accrual Method:

Net Income = Total Revenues - Total Expenses
Net Income = $5,300 - $2,540 = $2,760

Net Income using Accrual Method: $2,760

To summarize:

• Net Income (Loss) using Cash Method: ($320)
• Net Income using Accrual Method: $2,760