Question

Grace is a lawyer who operates her business as a sole proprietorship. During 2017 she receives $150,000 for her professional services. Of the amount collected, $50,000 was for services provided in 2016. At the end of 2017, her A/R balance was $65,000, which represented amounts due for services rendered in 2017. In addition, Grace received a pre-payment of $45,000 at the end of 2017 for services to be rendered in 2018.

a. Calculate Grace’s income using the cash basis method of accounting

b. Calculate Grace’s income using the accrual basis of accounting

Answer 1

Accrual concept is fundamental principle of accounting which required recording of revenue and expenses when they are earned or incurred. not when they are received or paid.

a)Cash basis method

Cash received for professional services

$ 150,000

b)Accrual basis

Cash received for professional services	$ 150,000
Less: Collection towards 2016 services	$ (50,000)
Add: Closing accounts receivable balance	$    65,000
Less: Pre payment received	$ (45,000)
Professional service income	$ 120,000