In its first year of operations, Roma Company reports the following. Earned revenues of $56,000 ($48,000 cash received from customers). Incurred expenses of $31,000 ($24,100 cash paid toward them). Prepaid $9,500 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;

Under accrual basis is $25,000

Under cash basis is $14,400  

Step-by-step explanation:

Under the accrual basis of accounting, revenue is recognized when it is earned and not necessarily when cash is collected. Services may be rendered on account or cash.

Expense may be incurred on account or cash basis. In the accrual system, the expense is recorded once it is incurred and not necessarily when cash is collected.

In the cash basis, both revenue and expense are only recognized when cash is collected and paid respectively.

Net income is the difference between the revenue and the expenses for a given period.

Under accrual basis,

net income = $56,000 - $31,000

= $25,000

Under the cash basis,

Net income = $48,000 - $24,100 - $9,500

= $14,400  

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step-by-step explanation:

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