In its first year of operations, Roma Company reports the following: • Earned revenues of $45,000 ($37,000 cash received from customers).

• Incurred expenses of $25,500 ($20,250 cash paid toward them).

• Prepaid $6,750 cash for costs that will not be expensed until next year.

Compute the company’s first-year net income under both the cash basis and the accrual basis of accounting.

Net Income - Cash basis = $10000

Net Income - Accrual basis = $19500

Explanation:

The cash basis of accounting accounts for transactions that occured in cash in the period when cash changes hand. This means that transactions are recorded when the cash is paid or received rather than to the period to which they actually relate to.

Cash basis net income will be,

Net Income = 37000  -  20250  -  6750

Net Income - Cash basis = $10000

The accrual basis of accounting follows that the transactions should be recorded in the period to which they relate to rather then when the cash is paid out or received.

Accrual basis Net income will be,

Net Income - Accrual basis = 45000 - 25500

Net Income - Accrual basis = $19500