Question

Al is a medical doctor who conducts his practice as a sole proprietor. During 2017, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2016. At the end of 2017, Al had accounts receivable of $60,000, all for services rendered in 2017. 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 be rendered in 2018. Compute Al’s gross income for 2017:

a. Using the cash basis of accounting.
b. Using the accrual basis of accounting.
c. Advise Al on which method of accounting he should use.

Answer 1

a. Using the cash basis of accounting:

Cash received from customer $280,000

Cash received for future service $12,000

Total gross income $292,000

b. Using the accrual basis of accounting:

Service revenue = ($280,000 - $40,000 + 60,000) = $300,000

Gross income $300,000

c) AI should use cash accural basis of accounting so that he will not have to pay income taxes on uncollected accounts receivable.