Donna owns a cleaning service. Reed, a customer, receives Donna's bill for October 2014 services of $65 on October 31, 2014. Reed pays the $65 on January 4, 2015. I. If Donna is a cash-basis taxpayer, she recognizes the income in 2015. II. If Donna is an accrual-basis taxpayer, she will recognize the $65 in 2014. III. Donna will recognize the $65 in 2014 regardless of accounting method, because that is when she earned the income.

Question

Quizplus · Accepted Answer

A cash-basis taxpayer recognizes income when it is received, so Donna recognizes it in 2015. An accrual-basis taxpayer recognizes income when it is earned, so Donna recognizes it in 2014.

Donna Owns a Cleaning Service