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    14 Replies Latest reply on Apr 17, 2015 3:56 PM by jbsocal

    year end revenue recognition

    sadorni Newbie

      I am a sole proprietor LLC and use cash basis accounting. If a check payment was issued to me on 12/29 and deposited 1/5 is the payment revenue for 2008 or 2009?
        • Re: year end revenue recognition
          LUCKIEST Guide
          year end revenue recognition, Welcome

          Useing cash basis accounting, a deposit you will make on Jan 5 (tomorrow) is income for 2009.

          Go to Members page and share some info.

          • Re: year end revenue recognition
            Bean Counter Adventurer
            Luckiest is correct.

            Cash basis means when you have access to the cash. you would recogmnize the income in 2009.
            • Re: year end revenue recognition
              Lighthouse24 Ranger
              First, I'm not an accountant. That said . . . I thought cash accounting meant that revenues were recorded during the period in which they were received, and expenses were recorded during the period in which they were actually paid. In this case, payment was received in 2008, and in my mind, would be recorded then. The fact that it was received in the form of a check would still make it a "cash" receipt in my mind -- as opposed to "credit" receipt (for which the business might still be waiting for actual payment).

              Hopefully Luckiest, BeanCounter, or somebody can set me straight on this (or confirm that I'm not off-base after all). Thanks.
                • Re: year end revenue recognition
                  LUCKIEST Guide
                  Cash basis is a method of accounting ("cash accounting") whereby cash flow of
                  financial events is considered. The method recognizes revenues when
                  cash is received and recognizes expenses when cash is paid out.
                  In cash accounting, revenues and expenses are also called cash receipts
                  and cash payments respectively.
                  Cash basis does not recognize promises to pay, expectations to receive money,
                  or services in the future, such as payables of accounts payable,
                  receivables of accounts receivable,
                  or prepaid or accrued expenses.
                  Cash accounting is simplest for individuals and organizations, which do not
                  have significant number of such transactions, or when the time lag between the
                  initiation of the transaction and the cash flow is very short.


                  Cash accounting is generally not acceptable for companies that must make
                  their financial statements publicly available. That is because most countries
                  require companies to use accrual accounting. Cash accounting is not considered
                  to provide a true and fair view of the financial performance and position
                  of an entity].

                  • Re: year end revenue recognition
                    Bean Counter Adventurer
                    Let me clarify my remark.

                    Lighthouse is corrrect on that revenue is recognized when received on the cash basis.

                    This particuliar situation is that the check has been received but not been deposited. My remark about recognizing the revenue in 2009 was based on the fact that the money was actually available and in the bank and that the check did not bounce.

                    Economic times are tough. The fact that you received a check does not necesarily mean you got paid! :-)

                    Hope that helps!
                      • Re: year end revenue recognition
                        Lighthouse24 Ranger
                        BeanCounter, thanks for trying to clarify. I see in your profile that you're a CPA -- I'm not, so I'm asking this to understand, not to argue . . .

                        Are you saying that if a customer pays you by check on 12/29, but you don't deposit it, then you haven't really been paid (i.e., you don't post anything) until you do deposit it (seven days later)? In my world, that would really mess up receivables tracking (it would look like the customer paid seven days late if I didn't show the payment on the date the customer paid).

                        But let's say that's what happens (and you end the year still carrying that amount as a receivable) . . . are you saying that on 1/5 when you make the deposit, you'd then debit the cash receipts? (It doesn't seem like you'd know any more than you did a week ago about whether or not the check will clear, so I'm not quite seeing the purpose.) Or are you saying that you have some kind of "check receipts" journal, and the entry is made there rather than as cash, and then later when the check clears, you post another transaction? (In that case, why wouldn't the receipt of the original check be posted on 12/29 when it was received)?

                        Trying to understand your process/answer. Thanks!
                          • Re: year end revenue recognition
                            Bean Counter Adventurer
                            Technically when you receive the check, you would make the entry that the check has been received in 2008.

                            If the check subsequently bounces, you technically have a bad debt in 2009 since you recognized the income in 2008.

                            I was making the point that the economy was bad and rather than going through all the motions of showing as revenue to be conservative and see if the check actually cleared and then recognize it in the books.

                            Sorry for the confusion. What technically should happen and what actual happens in the real world differs at times.

                              • Re: year end revenue recognition
                                Lighthouse24 Ranger
                                BeanCounter, you wrote:

                                Technically when you receive the check, you would make the entry that the check has been received in 2008.

                                Then wouldn't the answer to sadorni's original question be that the amount would show as revenue in 2008?

                                Thanks . . .
                                  • Re: year end revenue recognition
                                    Lighthouse24 Ranger
                                    Is there a definitive answer here? I'm still interested in the expanation if there is . . .
                                      • Re: year end revenue recognition

                                        Let's put it this way. Technically if you were in receipt of the check in 2008 then it is 2008 income. However, this is a very gray area as far as what is receipt. If you have control over it then the IRS considers it receipt. Let's be honest though, the IRS has no idea when you were in actual receipt of the funds. They typically go by the actual cash deposits unless you actually recognize deposits in transit as part of your year end bank reconcilation and cash basis accounting process. So a typical tax planning technique for a cash basis tax payer (not saying this is the right answer but it is used) is to hold of on depositing checks received near year end until the next year.

                                        As far as revenue recognition there is no triple entry. You book the A/R when you make the sale and then you book the payment received against it in the period you intend to recognize it.


                                        Cash flow management of this type along with cutting checks at the 11th hour on 12/31 is not that uncommon.


                                          • Re: year end revenue recognition
                                            sadorni Newbie
                                            Thank you for all the feedback. I opted to consider it as 2008 income. From everything I read on this thread, IRS forms and other websites there is no clear answer. The date something hits the bank account is a slippery slope and it opens the door for manipulating income and expenses (pre payment of expenses in mid December and holding onto receivables). I used the following logic in my decision
                                            - The check was issued in 2008
                                            - All work was completed in 2008
                                            - I invoiced for the work in November 2008
                                            - I expect to be in higher tax bracket in 2009 and would prefer to take advantage of my tax situation this year.
                              • year end revenue recognition

                                Consider this twist:  check is issued by a client on 12/31.  Check is mailed to a cash-based sole proprietor and is received on 1/5.  My assumption is that this payment would be counted as income in January.


                                Next, the client mails a 1099 to the proprietor in February showing the amount of the payment for the previous year. 


                                Now what year is the income counted in?

                                  • Re: year end revenue recognition
                                    jbsocal Adventurer

                                    This issue is still pertinent even though the original post is a bit old. I offer the following comments regarding these two items:

                                    1.     Form 1099 received

                                    2.     Cash Basis accounting: Checks: Expenses paid or Income received


                                    First, I'll address the last question: Does receiving a Form 1099 for year 20xx require a taxpayer to report income in year 20xx? Answer: NO


                                    There's a court case that's referenced on the IRS's own web site that states receiving a Form 1099 isn't conclusive. the court case includes the following statement:


                                    The Court found that the notice of deficiency (My Comment: a Notice of Deficiency is a notice issued by the IRS that proposes additional tax) was arbitrary because it merely matched the taxpayer's return with the Form 1099, assuming the taxpayer's return was false and the Form 1099 was correct. In such circumstances, the Service (IRS) is obligated to investigate. (End of court case reference.)


                                    It's common for Taxpayer A to receive income in year two from Taxpayer B who wrote a check in year one and included income on a Form 1099 issued to Taxpayer A. If Taxpayer A uses the cash basis method of accounting to report income, the income shown on the Form 1099 is not necessarily income in year one. As the court stated, "the Service is obligated to investigate."


                                    A cash basis taxpayer is NOT required to report the income if it wasn't received. A taxpayer has the right to explain why income reported on a Form 1099 wasn't actually income. However, if a taxpayer wishes to avoid any potential IRS conflict, the income may be reported in year one. Although that's not technically the correct year, I doubt the IRS will propose to change the year that the income was reported.


                                    Treatment of checks:

                                    Reporting on the cash basis generally means that a taxpayer reports income as received and expenses as paid. There are exceptions (constructive receipt, related parties, etc.); however, they are too involved for this discussion. Also, my comments assume a taxpayer has a December 31 year end. If a check is written and mailed on December 31, 2014, (ignore Sunday arguments) the IRS will allow the expense for 2014 even though it's highly unlikely that the check will be cashed prior to 2015. Many times rules like these are made to avoid unwarranted conflicts. IRS rules may not reflect reality but may be to simplify reporting.


                                    Receiving a check doesn't necessarily mean that income has been received. If a taxpayer receives a check on December 31 after the bank's close, the funds won't be available until the next year. I believe a valid argument may be made that even if a check is received days before the year end, income may not be received in that year because a bank may place a hold on the funds until the check clears. Remember, cash basis means funds are actually available to the taxpayer. Although the bank statement may show a December 28 deposit, that doesn't prove the funds were available. However, if a taxpayer wishes to report the check as income received and his method of accounting consistently reports in this manner, I believe the IRS would be hard pressed to change the reporting. As you can see, how check receipts are treated is not always clear - facts and circumstances may rule.


                                    I hope this post helps to clarify this issue.

                                  • Re: year end revenue recognition
                                    jbsocal Adventurer

                                    For your answer, read my post made on Dec. 9, 2014 (the last comment posted on this subject). If you have other questions, just ask.



                                    • Re: year end revenue recognition
                                      jbsocal Adventurer

                                      The first question shows "Not answered" but it has been. Just read the replies, particularly the one from me.