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D2. 'Explain why the purchase of supplies is usually recorded in an asset account rather than in an expense account. If supplies were expensed when purchased, which accounts should be debited and which credited at the end of the period in order to reflect the amount of supplies on hand? D6. The owner of a business reviews the income statement prepared by you and asks, 'Why do you report a profit of only $30 000 when cash collections of $100 000 were received and cash payments for the period totalled only $50 000 for expenses? How would you respond to the owner's question? Exercise 4.2 Cash versus Accrual basis of Accounting At the end of the first year of operations, Arch Etec, owner of Architect Designs, engaged you to prepare yearly financial statements for the year ended 30 June 2019, on both the cash basis and the accrual basis. The following data are a summary of selected transactions that occurred during the year. (Ignore GST.) 1. Fees of $125 000 were collected for services provided during the year. 2. There were S8000 in receivables at 30 June 2019 for services performed on credit. 3. Cash payments of $106 000 were made for salaries, rent, insurance and other cxpenses incurred during the year. 4. Salaries owing but not yet paid amount to $4000. 5. On 15 June 2019, a client paid $3000 in advance for services to be rendered during the next financial year. 6. Expenses of $6000 were prepaid (not included in the $106 000) at 30 June. Required (a) Calculate profit under both the cash basis and the accrual basis. (b) Indicate how the following items would be reported in the business's balance sheet under the accrual basis: (i) the $8000 receivables (ii) the unpaid salaries of $4000 (iii) the $3000 advance received on 15 June (iv) the cash payment of $6000 for prepaid expenses