Question

Al is a medical doctor who conducts his practice as a sole proprietor. During 2013, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2012. At the end of 2013, Al had accounts receivable of $60,000, all for services rendered in 2013. 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 2014.

Compute Al's gross income for 2013:
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. Cash basis

This recognizes revenue and expenses only when cash been received or spent.

Gross income for 2013 = Cash received for medical services + Advance payment

= 280,000 + 12,000

= $292,000

b. Accrual basis

This recognizes only revenue and expenses incurred in a period, regardless of if cash is paid or not.

Gross income for 2013 = Cash received for medical services - Cash received for medical services provided in previous periods + Accounts receivable

= 280,000 - 40,000 + 60,000

= $300,000

c. Use CASH BASIS OF ACCOUNTING

From a taxation point of view, using the cash basis would be more beneficial as Al will pay a less amount of tax as it is a lower income.

He will also be sure of the cash received unlike Accrual that recognizes Accounts receivable which have a chance of not being collected.