In your business’s first year in operation you had sales totaling $40,000 and collected $30,000 from your customers. You also incurred $20,000 in expenses but $5,000 of them will not be paid until the following year. Calculate your profit or loss under the cash and accrual basis methods.

To calculate your profit or loss under the cash and accrual basis methods, we need to understand the difference between these two accounting methods.

1. Cash Basis: This method records transactions when cash is received or paid. It only considers the actual cash inflows and outflows, regardless of when the revenue is earned or expenses are incurred.

2. Accrual Basis: This method records income and expenses when they are earned or incurred, regardless of when the cash is actually exchanged. It recognizes revenue when it is earned, and expenses when they are incurred, regardless of when the cash is received or paid.

Now, let's calculate your profit or loss under both methods.

Under the Cash Basis:

Revenue = Cash collected from customers = $30,000
Expenses = Cash paid = $20,000
Profit or Loss = Revenue - Expenses = $30,000 - $20,000 = $10,000

Under the Accrual Basis:

Revenue = Sales = $40,000
Expenses = Incurred expenses = $20,000
However, $5,000 of the incurred expenses will be paid in the following year, so we need to exclude that.

Adjusted Expenses = Incurred expenses - Unpaid expenses = $20,000 - $5,000 = $15,000

Profit or Loss = Revenue - Adjusted Expenses = $40,000 - $15,000 = $25,000

Therefore, your profit or loss under the cash basis method is $10,000, while under the accrual basis method it is $25,000.