Question

Nancy operates a business that uses the accrual method of accounting. In December, Nancy asked her brother, Hank, to provide her business with consulting advice. Hank billed Nancy for $5,000 of consulting services in year 0 (a reasonable amount), but Nancy was only able to pay $3,000 of the bill by the end of year 0. However, Nancy paid the remainder of the bill in year 1. a. How much of the $5,000 consulting services will Hank include in his income in year 0 if he uses the cash method of accounting? What amount can Nancy deduct in year 0 for the consulting services?

Answer 1

Answer:

Assuming both use cash basis, they will each deduct $3000 in year 0.

Explanation:

There are two basis to record transactions. Cash basis and accrual basis. According to accrual all the revenues and expenses are  matched against the period they occur. In Cash basis, only transactions are realized when actual cash is received. Assuming both Nancy and Hank use cash basis,

Hank will record 3000 cash income in year 0 and Nancy will record 3000 cash expense in year 0.

Hope that helps.