****PLEASE SHOW WORK...THANK YOU**** Sarah Crowly uses the cash receipts method
ID: 2476527 • Letter: #
Question
****PLEASE SHOW WORK...THANK YOU****
Sarah Crowly uses the cash receipts method of accounting for her accounting business. On December 25, 2014, she received a $1,000 check in payment for her services. The following year she was told that the check had bounced. One client offered to give her a check for $500 on December 31, 2014, but Sarah asked him to give it to her the next year, which the client did. Another client gave her a check for $750 on December 31, 2014, but after the bank had closed. Both the $500 and $750 checks cleared the next year. How much does Sarah have to include in her gross income for 2014?
Explanation / Answer
There are no strict rules for when income receipts or expense payments should be recognised by a business using the cash basis however, a business must use a consistent approach.
For example,
a business must decide what date to use when receiving payments by cheque; is it when the cheque is received from the customer? Or when it is paid into the bank? Or when it is shown on the bank account but cannot be drawn against? Or when the cheque has cleared? So if a business decides to record income only after cheques have been cleared, then that approach must be used consistently for all cheque receipts.
So, Sarah can recognise these cheques either in next year if she uses the basis to record the cheques received on date of actual credit to her account ($ 1250 in next year) or in current year if she uses the basis to record the cheques received on date of receipt of cheque ($ 500 in next year and $ 750 in current year)
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