Question

Al is a medical doctor who conducts his practice as a sole proprietor. During 2018, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2017. At the end of 2018, Al had accounts receivable of $60,000, all for services rendered in 2018. In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to lx? rendered in 2019- Compute Al’s gross income for 2018:

a. Using the cash basis of accounting.
b. Using the accrual basis of accounting.

Answer 1

a. 

Al’s gross income for 2018 on the cash basis is $292,000 ($280,000 + $12,000), which is the amount he actually collected in that year.

 

b. 

Al’s gross income computed by the accrual method is as follows:
Cash received                                                                   $292,000
Less: Income received but will not be earned until 2019   (12,000)
Less: Beginning-of-the-year accounts receivable              (40,000)
Plus: End-of-year accounts receivable                                60,000
                                                                                          $300,000

a. Al’s gross income is $292,000.

b. Al’s gross income is $300,000.