1 Grace is an lawyer who operates her business as a sole pro

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

Solution

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