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Katie Vote owns a small business that rents computers to students at the local university for the 9-month school year. Katie’s typical rental contract requires the student to pay the year’s rent of $1,800 ($200 per month) in advance. When Katie prepares financial statements at the end of December, her accountant requires that Katie spread the $1,800 over the 9 months that a computer is rented. Therefore, Katie can recognize only$800 revenue (4 months) from each computer rental contract in the year the cash is collected and must defer recognition of the remaining $1,000 (5 months) to next year. Katie argues that getting students to agree to rent the computer is the most difficult part of the activity so she ought to be able to recognize all$1,800 as revenue when the cash is received from a student.


Explain why generally accepted accounting principles require the use of accrual accounting rather than cash-basis accounting for transactions like the one described here.


Answered 11 months ago
Answered 11 months ago
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This exercise requires us to determine the reason for requiring an accrual method than a cash basis.

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