basic accounting question!! help please!!?

This is a transaction for the month of December.

On December 3rd, a customer orders merchandise from GD company for 4,000 dollars. GDP company receives payment for 4,000 dollars on December 4th. The cost of the merchandise was 1,500. GD company delivers the equipment on January 5th.

What is net income for December?

I thought it could be one of 3 options.

1. Irrelevant because the product isn't delivered till January.

2. 2,500 because it was sold for 4,000 minus 1,500 (cost of the merchandise)

3. 4,000 because for some reason, you don't take cost of the merchandise in to account because it's a past expense?

2 Answers

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  • rb
    Lv 4
    8 years ago
    Favorite Answer

    That depends whether you are using the accrual or cash accounting system. If it's accrual, then the net income is $2500 for December (because December is when the transaction is made); which is option 2.

    On the other hand, if you use the cash accounting system then the net income for December is $0 (because you recieve the cash the next month) assuming that no other income was made; which is similar to option 1.

    It can't be option 3 because the question is asking for net income, not sales. Net income = total revenue - expenses, whereas sales would be just the amount of sales which in this case is $4000.

  • 8 years ago

    That depends whether you are using the accrual or cash accounting system. If it's accrual, then the net income is $2500 for December (because December is when the transaction is made); which is option 2.

    On the other hand, if you use the cash accounting system then the net income for December is $0 (because you recieve the cash the next month) assuming that no other income was made; which is similar to option 1.

    It can't be option 3 because the question is asking for net income, not sales. Net income = total revenue - expenses, whereas sales would be just the amount of sales which in this case is $4000.

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