Question

Ann owns an accounting practice (sole proprietorship). During 2020, Ann received payments of $200,000. The $200,000 consists of: $30,000 payment for services rendered in 2019 but not paid by the client until 2020 $160,000 payment for services rendered and paid in 2020 $10,000 prepayment received in 2020 for services that will be rendered in 2021 In addition to the $200,000 payments received in 2020, at the end of 2020 Ann held accounts receivable of $10,000, all for services rendered in 2020. What is Ann’s gross income for 2020 if Ann is a cash-method taxpayer?

Answer 1

Calculation of gross income for 2020 of ANN

An amount of $ 30000 received for the services rendered in 2019 but not paid by client until 2020 =$30000

In 2020 , Payment received for services rendered = $160000

An amount of $10000 received as accrued income for services that will be rendered in 2021 = $10000

Gross income of 2020 = $30000+$160000+$10000

= $200000

Note :- It is assumed that ann is maintained his accounting as per cash basis.

Under the cash basis accounting, revenues and expenses are recognized as follows:
Revenue recognition: Revenue is recognized when cash is received.
Expense recognition: Expense is recognized when cash is paid.