Question

Bob Jones is a sole proprietor who operates a deck repair business. In March 2020, Bob contracted with the condo owners’ association for a Tuscaloosa condo complex to repair and renovate the existing wooden decks on the twenty condo units in the complex.    Bob agreed to perform the services for $100,000.   His crew started work during the first week of March, and the project will be completed by the last week of December 2020.   Bob will send the invoice to the condo owners association on January 2, 2021, but the payment will be made within 15 days of the invoice date and will be delivered to Bob during the first two weeks of January 2021.

1. If Bob uses the accrual method of accounting, when must Bob recognize the income from this work?
2. Alternatively, if Bob uses the cash method of accounting, when must Bob recognize the income from this work?  

Answer 1

Answer

Under the accrual basis of accounting, revenue is recognised in the period in which the performance obligation is performed by the Company amd the revenue is earned. In the extant case, the performance obligation was complete in the last week of December 2020, hence revenue should be recognised in the year ended December 2020.

Accounts Receivable Dr.  $100,000.

To Service Revenue Cr. $100,000.

Under Cash basis of accounting, revenue is reconised in the period in which the cash is received. In the extant case the Invoice will be raised in January 2021 and consideration will be collcted by mid January 2021, hence revenue should be recognised on actual receipt of money.

Cash.  $100,000.

To Service Revenue Cr. $100,000.