Difference between Accrual Profit & Cash Profit

Question:

Please find below, some commonly asked questions that should assist you further:

Q1. What do I do if my answer comes out in dollars and cents?

Q2. If there are two depreciation amounts?

Q3. Which depreciation method do I use?

Q4. When was the business purchased?

Answer:

		Dr.	Cr.
Date	Particulars	Amount	Amount
01-06-2018	Cash at Bank	$10,120
	Accounts Receivable	$19,111
	Motor Vehicle	$32,752
	Gym equipment	$21,829
	Stationery Supplies	$409
	Accounts Payable		$7,445
	Bank Loan		$25,131
	Capital		$51,645
01-06-2018	Prepaid Insurance	$2,375
	Cash at Bank		$2,375
01-06-2018	Sundry Expenses	$278
	Cash at Bank		$278
01-06-2018	Accounts Receivable	$1,012
	Gym Fees		$1,012
03-06-2018	Prepaid Rent	$3,177
	Cash at Bank		$3,177
03-06-2018	Accounts Receivable	$1,046
	Squash Fees		$1,046
04-06-2018	Cash at Bank	$1,484
	Accounts Receivable		$1,484
08-06-2018	Cash at Bank	$1,862
	Accounts Receivable		$1,862
10-06-2018	Cash at Bank	$1,954
	Squash Fees		$1,954
11-06-2018	Cash at Bank	$1,456
	Gym Fees		$1,456
12-06-2018	Cash at Bank	$2,091
	Membership Fees		$2,091
13-06-2018	Equipment Hiring Charges	$671
	Accounts Payable		$671
13-06-2018	Accounts Receivable	$825
	Gym Fees		$825
14-06-2018	Accounts Payable	$610
	Cash at Bank		$610
15-06-2018	Wages Expense	$2,157
	Cash at Bank		$2,157
16-06-2018	Advertising Expense	$745
	Cash at Bank		$745
18-06-2018	Cash at Bank	$1,860
	Squash Fees		$1,860
19-06-2018	Stationery Supplies	$817
	Cash at Bank		$817
21-06-2018	Accounts Receivable	$1,022
	Squash Fees		$1,022
21-06-2018	Drawings	$879
	Cash at Bank		$879
24-06-2018	Cash at Bank	$3,939
	Capital		$3,939
24-06-2018	Motor Vehicle Expense	$238
	Cash at Bank		$238
25-06-2018	Accounts Payable	$688
	Cash at Bank		$688
26-06-2018	Cash at Bank	$2,103
	Membership Fees		$2,103
26-06-2018	Advertising Expense	$1,132
	Accounts Payable		$1,132
27-06-2018	Equipment Hiring Charges	$463
	Cash at Bank		$463
29-06-2018	Wages Expenses	$2,157
	Cash at Bank		$2,157
29-06-2018	Cash at Bank	$1,587
	Gym Fees		$1,587

General Ledger:

	Cash at Bank			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Capital	$10,120		$10,120
01-06-2018	Prepaid Insurance		$2,375	$7,745
	Sundry Expenses		$278	$7,467
03-06-2018	Prepaid Rent		$3,177	$4,290
04-06-2018	Accounts Receivable	$1,484		$5,774
08-06-2018	Accounts Receivable	$1,862		$7,636
10-06-2018	Squash Fees	$1,954		$9,590
11-06-2018	Gym Fees	$1,456		$11,046
12-06-2018	Membership Fees	$2,091		$13,137
14-06-2018	Accounts Payable		$610	$12,527
15-06-2018	Wages Expenses		$2,157	$10,370
16-06-2018	Advertising Expense		$745	$9,625
18-06-2018	Squash Fees	$1,860		$11,485
19-06-2018	Stationery Supplies		$817	$10,668
21-06-2018	Drawings		$879	$9,789
24-06-2018	Capital	$3,939		$13,728
24-06-2018	Motor Vehicle Expenses		$238	$13,490
25-06-2018	Accounts Payable		$688	$12,802
26-06-2018	Membership Fees	$2,103		$14,905
27-06-2018	Equipment Hiring Charges		$463	$14,442
29-06-2018	Wages Expenses		$2,157	$12,285
	Gym Fees	$1,587		$13,872
				$13,872
	Accounts Receivable			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Capital	$19,111		$19,111
	Gym Fees	$1,012		$20,123
03-06-2018	Squash Fees	$1,046		$21,169
04-06-2018	Cash at Bank		$1,484	$19,685
08-06-2018	Cash at Bank		$1,862	$17,823
13-06-2018	Gym Fees	$825		$18,648
18-06-2018	Squash Fees	$1,022		$19,670
	Prepaid Insurance			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Cash at Bank	$2,375		$2,375
	Prepaid Rent			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
03-06-2018	Cash at Bank	$3,177		$3,177
	Motor Vehicle			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Capital	$32,752		$32,752
				$32,752
	Office Equipment			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Capital	$21,829		$21,829
				$21,829
	Stationery Supplies			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Capital	$409		$409
19-06-2018	Cash at Bank	$817		$1,226
				$1,226

	Accounts Payable			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Capital		$7,445		$7,445
13-06-2018	Equipment Hiring Charges		$671		$8,116
14-06-2018	Cash at Bank	$610			$7,506
25-06-2018	Cash at Bank	$688			$6,818
26-06-2018	Advertising Expenses		$1,132		$7,950
					$7,950
	Bank Loan			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Capital		$25,131		$25,131
					$25,131
	Capital			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Cash at Bank		$10,120		$10,120
	Accounts Receivable		$19,111		$29,231
	Motor Vehicle		$32,752		$61,983
	Gym equipment		$21,829		$83,812
	Stationery Supplies		$409		$84,221
	Accounts Payable	$7,445			$76,776
	Bank Loan	$25,131			$51,645
24-06-2018	Cash at Bank		$3,939		$55,584
					$55,584
	Drawings			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
21-06-2018	Cash at Bank	$879		$879
				$879

	Gym Fees			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Accounts Receivable		$1,012		$1,012
11-06-2018	Cash at Bank		$1,456		$2,468
13-06-2018	Accounts Receivable		$825		$3,293
29-06-2018	Cash at Bank		$1,587		$4,880
					$4,880
					$4,880
	Squash Fees			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
03-06-2018	Accounts Receivable		$1,046		$1,046
10-06-2018	Cash at Bank		$1,954		$3,000
18-06-2018	Cash at Bank		$1,860		$4,860
21-06-2018	Accounts Receivable		$1,022		$5,882
					$5,882
	Membership Fees			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
12-06-2018	Cash at Bank		$2,091		$2,091
26-06-2018	Cash at Bank		$2,103		$4,194
					$4,194

	Sundry Expenses			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
01-06-2018	Cash at Bank	$278		$278
				$278
	Equipment Hiring Charges			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
13-06-2018	Accounts Payable	$671		$671
27-06-2018	Cash at Bank	$463		$1,134
	Wages Expenses			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
15-06-2018	Cash at Bank	$2,157		$2,157
29-06-2048	Cash at Bank	$2,157		$4,314
	Advertising Expenses			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
16-06-2018	Cash at Bank	$745		$745
26-06-2018	Accounts Payable	$1,132		$1,877
	Motor Vehicle Expense			Balance
Date	Particulars	Dr.	Cr.	Debit	Credit
24-06-2018	Cash at Bank	$238		$238
				$238

Unadjusted Trial Balance:

Unadjusted Trial Balance
as on 30 June 2018
Account	Unadjusted T/B
	DR	CR
Cash at Bank	$13,872
Accounts Receivable	$19,670
Prepaid Insurance	$2,375
Prepaid Rent	$3,177
Motor Vehicle	$32,752
Accumulated Depreciation - Motor Vehicle
Office Equipment	$21,829
Accumulated Depreciation - Office Equipment
Stationery Supplies	$1,226
Accounts Payable		$7,950
Interest Payable
Wages Payable
Bank Loan		$25,131
Capital		$55,584
Drawings	$879
Gym Fees		$4,880
Squash Fees		$5,882
Membership Fees		$4,194
Sundry Expenses	$278
Equipment Hiring Charges	$1,134
Wages Expenses	$4,314
Advertising Expenses	$1,877
Motor Vehicle Expenses	$238
Interest Expenses
Depreciation Expenses
Insurance Expenses
Rent Expenses
Supplies Expenses
TOTAL	$1,03,621	$1,03,621

Income Statement:

Balance Sheet:

Balance Sheet
as on 30 June 2018
Current Assets:
Cash at Bank	13,872
Accounts Receivable	19,670
Prepaid Insurance	1,781
Prepaid Rent	2,542
Stationery Supplies	643
TOTAL CURRENT ASSETS		38,508
Non-Current Assets:
Motor Vehicle	32,752
Accumulated Depreciation - Motor Vehicle	-1,148
Office Equipment	21,829
Accumulated Depreciation - Office Equipment	-4,155
TOTAL NON-CURRENT ASSETS		49,278
TOTAL ASSETS		87,786
Current Liabilities:
Accounts Payable	7,950
Interest Payable	188
Wages Payable	308
TOTAL CURRENT LIABILITIES		8,447
Non-Current Liabilities:
Bank Loan	25,131
TOTAL NON-CURRENT LIABILITIES		25,131
TOTAL LIABILITIES		33,578
Capital:
Capital	55,584
Less: Net Loss	-497
	55,087
Less: Drawings	-879
TOTAL CAPITAL		54,208
TOTAL LIABILITIES & CAPITAL		87,786

Difference between Accrual Profit & Cash Profit:

The main concepts which is used in accounting which is related to reporting and recognising expenses and income are accrual and cash basis of accounting. The main difference which can be identified between cash basis and accrual basis of accounting is related to the difference in timing in which revenue and expenses of the business are recognize (Bac, 2013). The cash method of accounting is considered to be immediate in recognition of revenue and expenses whereas the accrual method considers anticipated revenue expenses of the business (Weil, Schipper & Francis, 2013). Another major difference which is present between cash basis and accrual basis of accounting is that cash basis of accounting does not consider any non-cash expenses such as depreciation expense and thereby does not provide a true view of the performance of the business. In the case of accrual basis of accounting, both cash and non-cash transactions are considered for estimating the accounting profits of the business. As cash basis of accounting does not recognize non-cash items of the business, a true and clear view of the profits cannot be obtained and therefore the method is not used much in large businesses.

In case of cash basis, revenues are only recognized in the income statement when cash is actually received and expenses are recognized only actual cash is paid. On the other hand, accrual method considers revenue which are actually earned during the period irrespect6ive of the fact that cash for the same is received or not. Similarly, expenses are also recorded in a similar manner. The accrual basis of accounting considers that money will be received for the goods and services which is delivered to the customers. Generally, cash basis of accounting is applied in small business organizations as in big businesses it has a tendency of overstating the health of the business (Weygandt, Kimmel & Kieso, 2015). Whereas accrual basis provides a true view of the financial health of a business for a year and is mostly used by businesses. Thus, it can be said that accrual basis of accounting is more appropriate in comparison to cash basis of accounting.

Workings:

In the books of Muscle Up
Adjusting Entries
		Dr.	Cr.
Date	Particulars	Amount	Amount
30-06-2018	Interest Expense	$188
	Interest Payable		$188
	Depreciation Expense	$5,303
	Accum. Depreciation - Motor Vehicle		$1,148
	Accum. Depreciation - Office Equipment		$4,155
	Insurance Expense	$594
	Prepaid Rent		$594
	Rent Expense	$635
	Prepaid Rent		$635
	Supplies Expense	$583
	Stationery Supplies		$583
	Wages Expenses	$308
	Wages Payable		308.1429

Computation of Cash Profit:
Particulars	Amount
Accounting Loss	-$497
Add:
Interest Payable	$188
Depreciation Expense	$5,303
Insurance Expense	$594
Rent Expense	$635
Supplies Expense	$583
Wages Payable	$308
	$7,115
Less:
Prepaid Rent	$3,177
Prepaid Insurance	$2,375
Purchase of Supplies	$817
Cash Profit	$746

The above figure shows the various items which are considered for the purpose of computing the accounting profits of the business. The figure shows that accounting loss which is computed considering accrual basis which considers non-cash expenses as well (Drexler, Fischer & Schoar, 2014). In order to obtain the cash profits of the business, all non-cash deductions are to be added back and the expenses which are still not paid are also to be added back to the figure. In addition to this, any prepaid expense which is associated with previous year is to be removed and this deducted. The prepaid expenses of the business which is shown in the above figure relates to expenses of another accounting period which have been paid in advance and therefore to ascertain the cash profits of the business, such expenses are to be deducted from the accounting profits. The cash profits of the business is shown to be $ 746 whereas following the accrual basis it showed a loss of $ 497.

Reference

Bac, A. (Ed.). (2013). International comparative issues in government accounting: The similarities and differences between central government accounting and local government accounting within or between countries. Springer Science & Business Media.

Drexler, A., Fischer, G., & Schoar, A. (2014). Keeping it simple: Financial literacy and rules of thumb. American Economic Journal: Applied Economics, 6(2), 1-31.

Weil, R. L., Schipper, K., & Francis, J. (2013). Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.

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