A In October of year 0 Janine received a 2500 payment from a

A) In October of year 0, Janine received a $2,500 payment from a client for 25 months of security services she will provide starting on November 1 of year 0. This amounts to $100 per month. What amount of revenue must Janine recognize in year 0 from the $2,500 advance payment for services if she uses the cash method of accounting?

B) In October of year 0, Janine received a $2,500 payment from a client for 25 months of security services she will provide starting on November 1 of year 0. This amounts to $100 per month. What amount of revenue must Janine recognize in year 1 from the $2,500 advance payment for services if she uses the accrual method of accounting?

Solution

A) Under the cash method of accounting, Janine must recognize the entire advance received as revenue in the year in which it is received. Thus, in year 0 Janine must recognize the entire $2,500 as revenue.

B) Under the accrual method of accounting, Janine must recognize 12 months revenue in year 1. Thus, of the $2,500 advance payment, she must recognize $100 x 12 months = $1,200 as revenue in year 1.