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 ?
The International Federation of Accountants (IFAC) through the issuance of the International Public Sector Accounting Standards--IPSAS declared the use of the accrual basis as a good accounting practice for the public sector.
Standards of Governmental Accounting and Financial Reporting/3-21 Scope and Applicability of This Statement/3-7 Measurement and Recognition of Termination Benefits/8-17 Measurement/9-11 Healthcare-Related Termination Benefits/9 Non-Healthcare-Related Termination Benefits/10-11 Recognition of Termination Benefit Liabilities and Expense in Accrual Basis Financial Statements/12-15 Recognition of Termination Benefit Liabilities and Expenditures in Modified Accrual Basis Financial Statements/16 Effects of a Termination Benefit on an Employer's Defined Benefit Pension or Other Postemployment Benefit Obligations/17
Generally, an accrual basis taxpayer must recognize the entire amount of the gain from the installment sale in the year of the sale.
The GFOA's recommended practice recognizes that FCA requires the gathering of cost information for solid-waste management operations on an accrual basis. This goal can be achieved in one of two ways:
For sales and dispositions on or after December 17, 1999, accrual-basis taxpayers must generally use the accrual basis of accounting to report sales on the installment method [IRC section 453(a)(2), as modified by P.L.
The second reporting model outlined in the ITC document would use essentially the same measurement focus and basis of accounting for all of a government's activities at all levels of reporting (i.e., flow of financial resources measurement focus and accrual basis of accounting).
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Both cash and accrual basis taxpayers may be affected if a contested liability exists.
Generally, accrual basis taxpayers include payments they receive for future services in gross income in the year of receipt.
Timing: A close corporation that leases property from a controlling shareholder may have its rent deductions deferred if it is on the accrual basis and the shareholder is on the cash basis.
2000-43, the IRS confirmed its position that neither an S corporation nor its shareholders is entitled to elect a deduction for charitable contributions on the accrual basis under Sec.
Accrual basis accounting became more common and reporting issues became a top priority for the profession.