Question

Al is a medical doctor who conducts his practice as a sole proprietor. During 2020, he received cash of $398,800 for medical services. Of the amount collected, $37,200 was for services provided in 2019. At the end of 2020, Al had accounts receivable of $88,000, all for services rendered in 2020. In addition, at the end of the year, Al received $11,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2021.

a. Compute Al's gross income for 2020 using the cash basis of accounting.
$-------

b. Compute Al's gross income for 2020 using the accrual basis of accounting.
$-------

c. Advise Al on which method of accounting he should use.

Al should use the (cash method/accrual method) of accounting so that he will not have to pay income taxes on the (uncollected accounts receivable/advance payment)  .

Answer 1

Answer-

AI’s Gross Income For 2020 using Cash Basis of Accounting

Particulars	Amount($)
For Medical Services	398,800
Advance From HMO	11,000
Gross Income For 2020	409,800

AI’s Gross Income For 2020 using Accrual Basis of Accounting

Particulars	Amount($)
For Medical Services Rendered In 2019. ( As per working Note 1 )	449,600
Gross Income For 2020	449,600

Service revenue (398,800-37,200+88,000)	449,600
Gross income	449,600

Working Note 1:

Accounts Receivable A/c

Particulars	Debit	Particulars	Credit
Opening Balance (assumed that all money received for 2019 is opening balance)	37,200	Cash Received During 2020	398,800
For Medical Services Rendered In 2020 (Balancing Figure)	449,600	Closing Balance	88,000
Total	486,800	Total	486,800

Al should use the cash method of accounting so that he will not have to pay income taxes on the uncollected accounts receivable.

Kindly give me thumbs up if u like my answer.....Thanks!!!