In its first year of operations, Grace Company reports the following:

Earned revenues of $60,000 ($52,000 cash received from customers);
Incurred expenses of $35,000 ($31,000 cash paid toward them);
Prepaid $8,000 cash for costs that will not be expensed until next year.

Net income under the accrual basis of accounting is:

A) $17,000.
B) $13,000.
C) $21,000.
D) $25,000.
E) None of these options are correct

D) $25,000.

Explanation:

The Accrual Basis of Accounting is the process in which income earned or expenses incurred are recorded at the time the transaction takes place, whether or not the cash has been exchanged.

Net Income is derived by subtracting Expenses from Revenue.

N.B. Prepaid Expenses are Advance Payments towards expenses and are a Balance Sheet Items and will not be recorded under Net Income Calculations until the Expenses are realized.

So, The Net Income can be calculated as follows;

Revenue $60,000

Less: Expenses $35,000

Net Income $25,000

Hence Option D will be correct answer.

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