Donna owns a cleaning service. Reed, a customer, receives Donna's bill for October 2018 services of $65 on October 31, 2018. Reed pays the $65 on January 4, 2019.
I.If Donna is a cash-basis taxpayer, she recognizes the income in 2019.
II.If Donna is an accrual-basis taxpayer, she will recognize the $65 in 2018.
III.Donna will recognize the $65 in 2018 regardless of accounting method, because that is when she earned the income.

Question

Donna owns a cleaning service. Reed, a customer, receives Donna's bill for October 2018 services of $65 on October 31, 2018. Reed pays the $65 on January 4, 2019.
I.If Donna is a cash-basis taxpayer, she recognizes the income in 2019.
II.If Donna is an accrual-basis taxpayer, she will recognize the $65 in 2018.
III.Donna will recognize the $65 in 2018 regardless of accounting method, because that is when she earned the income.
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Quizplus · Accepted Answer

Under the cash-basis accounting method, income is recognized when cash is received, so Donna would recognize the income in 2019 when Reed pays. Under the accrual-basis accounting method, income is recognized when earned, regardless of when payment is received, so Donna would recognize the income in 2018 when she provided the services.

Donna Owns a Cleaning Service