Accrual Basis

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Accrual Basis

A method of accounting that reflects expenses incurred and income earned for Income Tax purposes for any one year.

Taxpayers who use the accrual method must include in their taxable income any money that they have the right to receive as payment for services, once it has been earned. Any expenses that they may take as deductions when computing taxable income must be due at the time the deduction is taken. For example, suppose a surgeon performed a tonsillectomy in October 2003, and on December 31, 2003, he received a bill for carpeting installed in the waiting room of his office. He was paid the surgical fee on January 3, 2004, the same day he paid for the carpeting. The surgical fee will be included in his taxable income for 2003, the year in which he earned it, regardless of the fact that he was not paid until the following year.

His expenses for the carpeting can be deducted from his 2003 income because once he received the bill, he was bound to pay it. The fact that he did not pay for the carpeting until the following year does not prevent him from taking the deduction in 2003.

The accrual method of accounting differs from the cash basis method, which treats income as only that which is actually received, and expense as only that which is actually paid out. If the cash method were used in the above example, the payment of the surgical fee would be included as income for the 2004 tax year, the year in which it was received by the surgeon. The surgeon could deduct the cost of the carpeting only when he actually paid for it in 2004, although it had been installed in 2003.

Unearned income, such as interest or rent, is generally taxed in the year in which it is received, regardless of the accounting method that the taxpayer uses.

References in periodicals archive ?
Before assigning the first case, the instructor should review the basic accounting equation and expand the equation to focus on differences between the cash basis and accrual basis: Add simple matrices that show the additions and subtractions involved with conversion of the cash basis to the accrual basis.
However, the bulletins recommended that governments adopt governmental fund budgets using an accrual basis of accounting for revenues and expenditures (not expenses).
Here we distinguish commercial modified cash basis approach, which includes some elements from accrual basis accounting such as inventory and property capitalisation.
These farmers can maintain their books and records on an accrual basis, to measure their financial strength and maintain any debt covenants or other requirements banks may impose, while using the cash method of accounting for tax purposes.
If financial statements done under the accrual basis don't show any material difference from those done under cash accounting, there's little reason to switch.
On October 1, your calendar year company, which is on the accrual basis, signs a $15,000 painting contract and makes a $5,000 advance, which you record in Painting Expense.
We reach this conclusion, because section 461(d) requires that, in the case of accrual basis taxpayer, to the extent any action of a taxing jurisdiction taken after December 31, 1960, accelerates the time for accruing a tax liability, then such taxes shall be treated as accruing at the time they would have accrued but for such action of the taxing jurisdiction.
In financial statements prepared on the modified accrual basis of accounting, liabilities and expenditures for termination benefits should be recognized to the extent the liabilities are normally expected to be liquidated with expendable available financial resources.
Deferred Subscription Revenue, or revenue that has been received but not yet booked on the accrual basis has risen to $1,110,026 from $565,257.
general fund, special revenue funds), where the focus is on inflows and outflows of spendable resources and where transactions are recognized using the modified accrual basis of accounting.
The company continued to report its software-generated revenue on the cash basis, but reported its hardware income on the accrual basis for tax and financial purposes.
Martin stressed the need to change the budgetary treatment of PBGC's accounting from a cash to an accrual basis, citing the Pan Am example: "When PBGC lost over $600 million because of the termination of Pan Am's pension plans, it was reported in the federal budget for that year as a $10 million cost.