The Harding Co. in its first year earned $39,000 in revenues and received $33,000 cash from customers. They incurred expenses $22,000, but had not paid $2,250 of them at year-end. Harden also prepaid $3,750 cash for expenses to be incurred in the next year.

Calculate the first year's net income under both the cash basis and accrual basis of accounting. How do I do this, the textbook only gives an example for prepaid insurance?

To calculate the first year's net income under both the cash basis and accrual basis of accounting, you need to understand the key differences between the two methods:

1. Cash basis accounting: This method recognizes revenues and expenses only when cash is received or paid.

2. Accrual basis accounting: This method recognizes revenues when they are earned and expenses when they are incurred, regardless of the actual cash flow.

Now let's calculate the net income under both methods step-by-step:

1. Cash basis accounting:
- Revenues: $33,000 (cash received)
- Expenses: $22,000 (cash paid)
- Net income: Revenues - Expenses = $33,000 - $22,000 = $11,000

2. Accrual basis accounting:
- Revenues: $39,000 (total earned revenues)
- Expenses: $22,000 (incurred expenses) + $2,250 (unpaid expenses) + $3,750 (prepaid expenses) = $28,000
- Net income: Revenues - Expenses = $39,000 - $28,000 = $11,000

In this case, the net income is the same under both the cash basis and accrual basis of accounting. This is because the revenues and expenses are equal for both methods, even though the timing of recognition may vary.

Please note that this is a simplified example, and in practice, there may be more complex revenue and expense recognition scenarios.

To calculate the first year's net income under both the cash basis and accrual basis of accounting, we need to understand the difference between these two methods.

1. Cash Basis Accounting:
Under the cash basis of accounting, revenues and expenses are recognized when cash is received or paid. Therefore, net income is calculated by subtracting expenses paid in cash from revenues received in cash.

In this case:
Revenues received in cash: $33,000
Expenses paid in cash: $22,000
Net Income (Cash Basis) = Revenues - Expenses = $33,000 - $22,000 = $11,000

2. Accrual Basis Accounting:
Under the accrual basis of accounting, revenues and expenses are recognized when they are earned or incurred, regardless of when cash is received or paid. Therefore, we need to make adjustments to account for revenues earned and expenses incurred but not yet paid.

In this case:
Revenues earned: $39,000 (since it is the amount earned in the first year)
Expenses incurred: $22,000
Expenses not yet paid (accrued expenses): $2,250 (because they were incurred but not paid at year-end)
Prepaid expenses: $3,750 (expenses that were paid in cash but will be incurred in the next year)

To calculate net income (Accrual Basis), we need to make the following adjustments:

a) Add the expenses not yet paid:
$22,000 (incurred expenses) + $2,250 (accrued expenses) = $24,250

b) Subtract the prepaid expenses:
$24,250 - $3,750 = $20,500

c) Add the revenues earned:
$20,500 + $39,000 = $59,500

Net Income (Accrual Basis) = $59,500

Therefore, under the cash basis of accounting, the first year's net income is $11,000, while under the accrual basis of accounting, the first year's net income is $59,500.

Remember, in accrual accounting, adjustments are made to reflect revenues earned and expenses incurred, regardless of the timing of cash inflows or outflows. These adjustments include accrued expenses (expenses incurred but not yet paid) and prepaid expenses (expenses paid in advance). It's essential to understand these adjustments while calculating net income under the accrual basis of accounting.