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immediately recognize the revenue earned for all five cars. Their books would reflect a debit inaccounts receivable of $60,000 and credit in sales of $60,000. Once the business receives areceipt of payment, their books would reflect a debit in cash and a credit to accounts receivable. Economic ImpactThe economic impact on the client’s financial situation will vary depending on the type ofbusiness entity Bob decides to use for his car business. When forming a business entity, ownersnot only have to deal with different benefits. But they must deal with business liabilities andpersonal liabilities as well. For example, in a corporation, it’s separate from its owners and hasthe right to loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.If Bob forms his business as a pass-through entity such as an S Corporation or partnerships, allowners would be protected by any liabilities and share the business’s gains/losses equally. Inaddition, by forming an S corporation under 26 U.S.C. § 1366, owners can report the flow-through of income and losses on their personal tax returns and are assessed tax at their individualincome tax rates. [Fin1]
Running head: Revenue Recognition and Accounting Methods P a g e | 4The Cash or Accrual Accounting MethodAs mentioned previously, I think forming an S Corporation is best for Bob’s business.According to the IRS, S corporations pass income, losses, deductions, and credits through totheir shareholders for federal tax purposes. This allows S corporations to avoid double taxationon the corporate income. [IRS8] As an S Corporation, Bob can file his tax returns using both the