Question

Al is a medical doctor who conducts his practice as a sole proprietor. During 2019, he received cash of $592,600 for medical services. Of the amount collected, $52,800 was for services provided in 2018. At the end of 2019, Al had accounts receivable of $93,100, all for services rendered in 2019. In addition, at the end of the year, Al received $16,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2020.

a. Compute Al's gross income for 2019 using the cash basis of accounting.
$

b. Compute Al's gross income for 2019 using the accrual basis of accounting.
$

c. Advise Al on which method of accounting he should use.

Al should use the   of accounting so that he will not have to pay income taxes on the  .

Answer 1

AI’s Gross Income For 2019 using Cash Basis of Accounting

Particulars	Amount($)
For Medical Services	592600
Advance From HMO	16000
Gross Income For 2019	608600

AI’s Gross Income For 2019 using Accrual Basis of Accounting

Particulars	Amount($)
For Medical Services Rendered In 2019. ( As per working Note 1 )	632900
Gross Income For 2019	632900

Working Note 1:

Accounts Receivable A/c

Particulars	Debit	Particulars	Credit
Opening Balance (assumed that all money received for 2018 is opening balance)	52800	Cash Received During 2019	592600
For Medical Services Rendered In 2019 (Balancing Figure)	632900	Closing Balance	93100
Total	685700	Total	685700

AI should use Cash method of accounting for computing Gross Income.As in Cash Basis of accounting gives low amount of Gross Income.