Question

Hibiscus Corporation began operations on January 1, Year 1. On December 15, Year 1, the company received a payment in the amount of $12,000 from a customer that covers landscaping services to be performed during the months of April, May, and June of Year 2. The company uses the cash basis. How much landscaping revenue will be reported on the company's income statement for the year ended December 31, Year 1?

Answer 1

Answer:

$12,000

Explanation:

The main difference between cash basis accounting and accrual accounting is that accrual accounting recognizes revenue only after the earning process is completed. On the other hand, cash basis accounting recognizes revenue and expenses when the money is received or paid, regardless of when the service is provided. This is why the US GAAP doesn't allow cash basis accounting.

The IRS allows cash basis accounting for individuals and small businesses that only deal with cash payments, but they must meet certain criteria:

• partnerships or C corporations with less than $5 million in yearly revenue
• sole proprietorships and S corporations with less than $1 million in yearly revenues
• family owned farms
• you provide personal services and 95% of your revenue comes from it
• no publicly traded corporation is allowed