How to Compute Gross Income Using the Cash Method of Accounting

When it comes to calculating gross income for tax purposes, individuals like Hank who use the cash method of accounting as a calendar-year taxpayer need to carefully consider the timing of transactions. In the scenario provided where Mike paid Hank $270 in cash in December and promised to pay the remaining $440 with interest in three months, the key principle is to only include actual cash received in the current year.

By following the cash method of accounting, Hank must adhere to the concept of recognizing income when it is actually received in cash, rather than when it is promised or billed. This means that any amounts promised for future payment, like the $440 in this case, would not be included in Hank's gross income until they are physically received.

It's essential for Hank to accurately track and report his income based on cash receipts to ensure compliance with tax regulations. In situations where payments are made in installments or future promises are involved, only the cash actually received during the calendar year should be accounted for.

It's important to note that different accounting methods, such as the accrual method, may provide different results in terms of recognizing income. However, for individuals like Hank who prefer the simplicity and clarity of the cash method, adhering to the principle of recognizing cash receipts is crucial for accurate income reporting.

In conclusion, under the cash method of accounting, Hank must only include the actual cash received during the calendar year in his gross income, which in this case is $270.