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 ?
(2) Adjustment of prior year budget figures for accrual accounting: OMB has adjusted FY2001 and FY2002 figures--though not figures for earlier years--to be comparable to the new, proposed treatment of civilian retirement and health benefits.
The bill would clarify, by amending Section 446, that Section 448 should not be considered a floor for the use of accrual accounting, but a permissive ceiling for the use of cash accounting.
The successful standardization of accrual accounting across industries soon led to a very strong bond between accounting earnings and securities valuation by investors.
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The federal government agreed to the bailout only if New York switched to accrual accounting.
This is in sharp contrast with the principles of accrual accounting and FASB's standards, which require that any deviations from prior benefit formulas be explicitly calculated due to the different amortization period for these types of expenses.
(2007)., [much less than] Accrual Accounting in the Public Sector [much greater than], Paper from the FEE Public Sector Committee, 33 p.
MEMBER states of the European Union (EU) have been encouraged at a European Federation of Accountants (FEE) sponsored-conference in Brussels to follow in the European Commission's footsteps and adopt accrual accounting practices.
Rich (Illinois State University) and Jones (Auburn University) introduce accounting information systems, accrual accounting, internal control and cash, sales and receivables, cost of goods, operating assets, current and contingent liabilities, long-term liabilities, stockholders' equity, cash flow statements, and financial statement analysis.
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