Mary Wade owns a small business that rents parking spaces to students at the local university. Mary’s typical rental contract requires the student to pay the year’s rent of $720 ($60 per month) in advance. When Mary prepares financial statements at the end of December, her accountant requires that Mary spread the $720 over the 12 months that a parking space is rented. Therefore, Mary can recognize only $240 revenue (four months) from each contract in the year the cash is collected and must defer recognition of the remaining $480 (eight months) to next year. Mary argues that getting students to agree to rent the parking space is the most difficult part of the activity so she ought to be able to recognize all $720 as revenue when the cash is received from a student.
Required:
Explain generally accepted accounting principles require the use of accrual accounting rather than cash-basis accounting for transactions like the one described here.