Aye Corp sells $10,000 of goods on account in the current year and collects $7,500 of this. It incurs $6,000 in expenses on account during the current year and pays $4,000 of them. Aye would report what amount of profit under the cash and accrual bases of accounting, respectively?

Question

Quizplus · Accepted Answer

Under cash basis accounting, profit is recognized only when cash is received and expenses are paid. Therefore, Aye would report a profit of $3,500 ($7,500 collected - $4,000 paid) on the cash basis.

Under accrual basis accounting, profit is recognized when the revenue is earned (even if cash hasn't been received yet) and expenses are incurred (even if cash hasn't been paid yet). Therefore, Aye would report a profit of $4,000 ($10,000 sold - $6,000 incurred) on the accrual basis.

Aye Corp Sells $10,000 of Goods on Account in the Current