Third Party Pays Business's Consulting Fees

BACKGROUND
An agricultural business hires a consultant to analyze and make recommendations for improved pasture land. The consultant bills the agricultural business $6,000.

The agricultural business qualifies for Federal money to pay the $6,000 fee. The Federal Government pays the consultant the $6,000 directly.

The Federal government sends the agricultural business a 1099 for the $6,000 for income tax purposes at year's end.

QUESTION
How is this transaction journalized?

1. On an accrual basis and,

2. On a cash basis.

Thank you for your help

Hi,

This question sounds like it pertains to a bookkeeping / accounting assignment. As you won't learn what you are supposed by having me answer the question, I suggest you go through your course material.

If you can't find anything in your course material that will assist you in answering this question, the IRS publishes the Farmer's Tax Guide Publication 225. It discusses the different accounting methods with examples as well as agricultural program payments.

In Canada, farmers (and fisherman) are permitted to use the cash basis of accounting but it may not always be the best choice. JA Smith has a good article demonstrating the difference between cash basis and accrual basis accounting at jasmith.com/cash-basis-accounting-for-farmers .

Often times the best way to approach your bookkeeping / accounting assignments is to THINK FIRST about the information provided and what you know based on that information ... BEFORE you even start to answer the question.

So here is my hint to you ... what is the purpose of a 1099 form? Why do you think the government issued the 1099? What would you normally do once you receive a 1099 form? How does recording income differ between the accrual method of accounting vs the cash basis method of accounting?

Once you figure that out, I think you'll be able to complete your assignment. Keep in mind the possibility that there may be government regulations that restrict how a certain type of income may or may not be recorded for tax purposes ... which is different than financial (GAAP) reporting requirements.