Question

Malo Inc. uses a fiscal year ending June 30. On May 29, Malo received a check for $3,900 from a business that leases parking spaces in Malo’s parking garage. This payment was for the three-month period beginning June 1. On June 15, Malo sent an invoice for $5,500 to a customer for services rendered during May and June. Malo received payment from the customer on July 3. If Malo is a cash basis taxpayer, how much income should it recognize from the given transactions in the current fiscal year? If Malo is an accrual basis taxpayer, how much income should it recognize from the given transactions in the current fiscal year?

Answer with Services Performed and Prepaid Rent income

Answer 1

Under cash system of accounting income is realised when the same is credited to the bank account of the assessee or the same is received in cash. Hence, if Malo is cash basis taxpayer , he must recognise $3900 as income during fiscal year ending 30.06.×××× i.e previous fiscal year and an amount received on july i.e $ 5500 in the current fiscal year.

When the assessee follows accrual basis of accounting the income & expenses are recognised at the time they are accrued or incurred regardless of the fact that when cash is being exchanged. Hence, if Malo follows accrual basis of accounting , income of $(3900/3)×2 =$2600 will be income of current fiscal year as it ends on june 30