Determine the effects of the following on a cash basis taxpayer\'s gross income

Question

Determine the effects of the following on a cash basis taxpayer's gross income for 2015 and 2016. On the morning of December 31, 2015. the taxpayer received a $1,500 check from a customer. The taxpayer did not cash the check until January 3, 2016. The same as part (a), except the customer asked the taxpayer not to cash the check until January 3, 2016. after the customer s salary check could be deposited The same as part (a), except the check was not received until after the bank had closed on December 31, 2015.

Explanation / Answer

In accounting there are two methods named as 1. Accrual Basis and 2. Cash Basis are going to be used in deteriming net income.

1. Accrual Basis: In this method the income or revenue is recognized as and when revenue earned and expenses incurred. It does not bother about the payment in cash accutally made to meet such expenses or receipt in cash accutally received from such revenues.

2. Cash Basis: In this method the income or revenue is recognized by considering revenues or invomes on their actual receipt or payment in cash.

Effects of given situations on a cash basis taxpayer's gross income for 2015 and 2016 is as follows:

a. Check received by the taxpayer on the morning of December 31, 2015 is $1,500 and the taxpayer did not encash the check until January3, 2016 though cash in not received on the check on or before Decembre 31, 2015 it is included in determing the gross income for 2015. Since, received check for $1,500 is equivalent to cash received on 31-12-2015. Accordingly, it will fall under the year 2015 to ascertain thecash bais taxpayer's gross income for the year 2015.

b. Check received by the taxpayer on the morning of December 31, 2015 is $1,500 and the customer asked the taxpayer not to cash the check until January 3, 2016, after the customer's salary chech could be deposited. Though check received by cash bais taxper it could not be considered as cash received on 31-12-2015. Here, customer put the condition regarding depisiting of check that makes the cash basis taxpayer unable to deposit and encash the check until January 3, 2016. Effecting, cash will be received by the taxpayer on or after January 3, 2016 considered in calculating gross income for 2016.

c. Check received by the taxpayer on December 31, 2015 is $1,500 (after bank working hours) or closing of the bank. It is not the valid point that check received on December 31, 2015 with in the banking hours or after the banking hours. If the cash basis taxpayer receives the check on December 31, 2015 at any time with out any conditions laid by the customer with recept to realisation of cash on that check it should be considered in determing the gross income for 2015.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.