Question

1. Grace is an 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

a. Grace income using the cash basis method of accounting
Detail		Amount	Remark
Amount received in 2017 for professional service including amount collected for 2016		150000	Collection for previous year will not be deducted due to Cash method of accounting
A/ R Balance for service rendered in 2017 will be $65000		-	will be considered only when cash received.
Prepayment recived for service will be rendered in 2018		45000	will be considered in current year due to cash recived in advance
Income in 2017 on cash basis will be		195000
b. Grace income using the Accrual basis method of accounting
Detail		Amount	Remark
Amount received in 2017 for professional service including amount collected for 2016	150000		Collection for previous year will be deducted
Amount related with 2016	-50000	100000
A/ R Balance for service rendered in 2017 will be $65000		65000	Amount will considered as income due to accrual basis
Prepayment recived for service will be rendered in 2018	45000	-	will not be considered as income in current year
Income in 2017 on accrual basis will be		165000