Question

Larry uses an accrual method of accounting and a calendar year. On December 30, 2019, he completed work for a client and submitted his bill. The client had no dispute with the work done or the amount of the bill. The client paid Larry's bill in 2020. In which year should he report the income from this project?

A) 2019
B) 2020
C) 2018
D) 2021

Answer 1

Larry should report the income from this project in the year 2019, following the accrual method of accounting.

Step-by-step explanation:

Larry should report the income from this project in the year 2019.

According to the accrual method of accounting, income is reported when it is earned, regardless of when it is received. Since Larry completed the work and submitted the bill in 2019, the income is considered earned in that year, even though the client paid the bill in 2020. This ensures that income and expenses are matched in the same reporting period.

Reporting the income in 2019 also follows the principle of revenue recognition, which states that revenue should be recorded when it is both earned and realized or realizable.