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Basis of accountingFrom Wikipedia, the free encyclopedia

  (Redirected from Comparison of cash and accrual methods of accounting)

The cash basis (EU VAT vocabulary Cash accounting ) and the accrual basis are the two primary methods of trackingincome and expenses in accounting.

Both can be used in a r ange of situations from the accounts of a whole country, [1] a large corporation, a small business

an individual. In many cases regulatory bodies may require individuals, businesses or corporations use one method or theother. When this is not the case, the choice of which to use is an important decision as both have advantages and

disadvantages.[2][3]

Accrual basis

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 n be paid until much later.

In the United States tax environment, the accrual basis has been an option since 1916.[4] An "accrual basis taxpayer" loo

to the "all-events test" and "earlier-of test" to determine when income is earned. [5] Under the all-events test, an accrual basis taxpayer generally must include income "for the taxable year when all the events have occurred that fix the right to

receive income and the amount of the income can be determined with reasonable accuracy."[5] Under the "earlier-of test

an accrual basis taxpayer receives income when (1) the required performance occurs, (2) payment therefore is due, or (

 payment therefore is made, whichever happens earliest.[6] Under the earlier of test outlined in Revenue Ruling 74-607, anaccrual basis taxpayer  may be treated as a cash basis taxpayer when payment is received before the required performanc

and before the payment is actually due. An accrual basis taxpayer generally can claim a deduction "in the taxable year inwhich all the events have occurred that establish the fact of the liability, the amount of the liability can be determined wit

reasonable accuracy, and economic performance has occurred with respect to the liability."[7]

Similar def inition of accrual basis accounting is true for financial accounting purposes, except that r evenue can't be

recognized until it is earned, even if a cash payment has already been received by the tax authorities. [8]

See also

Accr ual#Accruals in accounting

Adjusting entries

Claim of r ight doctrine

Def erral

Matching principle

Revenue recognition

Tax accounting

References

1. ^ "Measuring the Deficit: Cash vs. Accrual" (http://www.gao.gov/special.pubs/longterm/deficit/). Government

Accountability Office. Retrieved 19 January 2011.

2. ^ "Cash vs. Accrual Accounting" (http://www.inc.com/articles/2000/04/19194.html), Inc.com

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5/27/2014 Basis of accounting - Wikipedia, the free encyclopedia

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3. ^ "Measuring the Deficit: Cash vs. Accrual" (http://www.gao.gov/special.pubs/longterm/deficit/), GAO.gov

4. ^ a b Treas . Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)

5. ^ a b Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)(A); Revenue Ruling 74-607

6. ^ R evenue Ruling 74-607

7. ^ Treas. Reg., 26 C.F.R. § 1.461-1(a)(2)(i)

8. ^ "What are Accruals and the Meaning of Accrued in Accounting?" (http://simplestudies.com/accruals-meaning-of-

accr ued-in-accounting.html). Simplestudies LLC. 25 February 2010. Retrieved 25 February 2010.

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Categories:  Personal taxes Corporate taxation in the United States Accounting systems Economics comparisons

Accounting terminology

This page was last modified on 4 December 2013 at 22:29.

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