Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting.

Revenue recognized $19,000
Accounts receivable 3,000
Expenses incurred 7,250
Accounts payable (related to expenses) 750
Supplies purchased with cash 1,800

$7,950

Explanation:

Under the cash basis of accounting, revenue and expenses are only recognized when cash has been received and paid respectively.

As such, there are no accrual as expected in the accrual system of accounting. No cash collection, no revenue recognition, no cash payment, no expense recognition.

Revenue recognized would include cash and credit sales.

Cash sales = $19,000 - $3,000

= $16,000

Expense recognized includes cash expenses and credit expenses

cash expense = $7,250 - $750

= $6,250

Total expense will also include supplies purchased using cash

Total expense = $6,250 + $1,800

= $8,050

net income is the difference between the sales and expenses.

net income = $16,000 - $8,050

= $7,950

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