A basis of accounting is the time various financial transactions are recorded. The cash basis (EU VAT vocabulary cash accounting) and the accrual basis are the two primary methods of tracking income and expenses in accounting.
Both can be used in a range of situations, from the accounts of a whole country[1] or a large corporation to those of a small business or an individual. In many cases, regulatory bodies require individuals, businesses or corporations to use one method or the other. When this is not the case, the choice of which to use is an important decision, as both methods have advantages and disadvantages.[2][3]
The accrual method records income items when they are earned and records deductions when expenses are incurred.[4] For a business invoicing for an item sold, or work done, the corresponding amount will appear in the books even though no payment has yet been received, and debts owed by the business show as they are incurred, even though they may not be paid until much later.[5]
In the United States tax environment, the accrual basis has been an option since 1916.[4] An "accrual basis taxpayer" looks to the "all-events test" and "earlier-of test" to determine when income is earned.[6] Under the all-events test, an accrual basis taxpayer generally must include income "for the taxable year when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy".[6] Under the "earlier-of test", an accrual basis taxpayer receives income when (1) the required performance occurs, (2) payment therefor is due, or (3) payment therefor is made, whichever happens earliest.[7] Under the earlier of test outlined in Revenue Ruling 74–607, an accrual basis taxpayer may be treated as a cash basis taxpayer when payment is received before the required performance and before the payment is actually due. An accrual basis taxpayer generally can claim a deduction "in the taxable year in which all the events have occurred that establish the fact of the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred with respect to the liability".[8]
Similar definition of accrual basis accounting is true for financial accounting purposes, except that revenue cannot be recognized until it is earned, even if a cash payment has already been received by the tax authorities.[9]
Also referred to as the modified cash basis, combines elements of both accrual and cash basis accounting. The modified method records income when it is earned but deductions when expenses are paid out. The recording of income is then of accrual basis, while the recording of expenses is cash basis. The modified method does not conform to the GAAP.[10]
^"What is the meaning of accrued in accounting?". Simplestudies LLC. 25 February 2010. Retrieved 25 February 2010.
^Ernst, James. . ECHO. Archived from the original on 8 August 2014. Retrieved 5 August 2014.
"HOA Accounting and Financial Statements Overview". CSM.
January 01, 1970
basis, accounting, accounting, method, redirects, here, computer, science, method, accounting, method, computer, science, examples, perspective, this, article, deal, primarily, with, united, states, represent, worldwide, view, subject, improve, this, article, . Accounting method redirects here For the computer science method see Accounting method computer science The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject You may improve this article discuss the issue on the talk page or create a new article as appropriate February 2011 Learn how and when to remove this message A basis of accounting is the time various financial transactions are recorded The cash basis EU VAT vocabulary cash accounting and the accrual basis are the two primary methods of tracking income and expenses in accounting Both can be used in a range of situations from the accounts of a whole country 1 or a large corporation to those of a small business or an individual In many cases regulatory bodies require individuals businesses or corporations to use one method or the other When this is not the case the choice of which to use is an important decision as both methods have advantages and disadvantages 2 3 Contents 1 Accrual basis 2 Modified cash basis 3 See also 4 ReferencesAccrual basis editThe accrual method records income items when they are earned and records deductions when expenses are incurred 4 For a business invoicing for an item sold or work done the corresponding amount will appear in the books even though no payment has yet been received and debts owed by the business show as they are incurred even though they may not be paid until much later 5 In the United States tax environment the accrual basis has been an option since 1916 4 An accrual basis taxpayer looks to the all events test and earlier of test to determine when income is earned 6 Under the all events test an accrual basis taxpayer generally must include income for the taxable year when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy 6 Under the earlier of test an accrual basis taxpayer receives income when 1 the required performance occurs 2 payment therefor is due or 3 payment therefor is made whichever happens earliest 7 Under the earlier of test outlined in Revenue Ruling 74 607 an accrual basis taxpayer may be treated as a cash basis taxpayer when payment is received before the required performance and before the payment is actually due An accrual basis taxpayer generally can claim a deduction in the taxable year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic performance has occurred with respect to the liability 8 Similar definition of accrual basis accounting is true for financial accounting purposes except that revenue cannot be recognized until it is earned even if a cash payment has already been received by the tax authorities 9 See also Artnell Company v Commissioner U S tax ruling on treatment of prepayments Modified cash basis editAlso referred to as the modified cash basis combines elements of both accrual and cash basis accounting The modified method records income when it is earned but deductions when expenses are paid out The recording of income is then of accrual basis while the recording of expenses is cash basis The modified method does not conform to the GAAP 10 See also editAccrual Accrual accounting in the public sector Adjusting entries Claim of right doctrine Deferral Matching principle Revenue recognition Tax accountingReferences edit Measuring the Deficit Cash vs Accrual Government Accountability Office Archived from the original on 15 October 2013 Retrieved 19 January 2011 Cash vs Accrual Accounting Inc com Measuring the Deficit Cash vs Accrual Archived 15 October 2013 at the Wayback Machine GAO gov a b Treas Reg 26 C F R 1 446 1 c 1 ii root Accrual Accounting Definition Investopedia Retrieved 7 October 2015 a b Treas Reg 26 C F R 1 446 1 c 1 ii A Revenue Ruling 74 607 Flamingo Resort Inc v United States 664 F 2d 1387 9th Cir 1982 Revenue Ruling 74 607 Treas Reg 26 C F R 1 461 1 a 2 i What is the meaning of accrued in accounting Simplestudies LLC 25 February 2010 Retrieved 25 February 2010 Ernst James 3 Methods of HOA Accounting and How They Effect Financial Statements ECHO Archived from the original on 8 August 2014 Retrieved 5 August 2014 HOA Accounting and Financial Statements Overview CSM Retrieved from https en wikipedia org w index php title Basis of accounting amp oldid 1188002921, wikipedia, wiki, book, books, library,
