Accrual Method of Accounting

An Accrual Method of Accounting is a basis of accounting in which organizational economic transactions are recognized (on the income statement) when they occur.

• AKA: Accrual Basis.
• Example(s):
  • …
• Counter-Example(s):
  • a Cash Method of Accounting.
• See: All-Events Test, Cash Account.

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References

2015

• (Wikipedia, 2015) ⇒ http://en.wikipedia.org/wiki/basis_of_accounting#Accrual_basis Retrieved:2015-12-7.
  • The accrual method records income items when they are earned and records deductions when expenses are incurred. 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. In the United States tax environment, the accrual basis has been an option since 1916. An "accrual basis taxpayer" looks to the “all-events test” and "earlier-of test" to determine when income is earned. 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.” Under the "earlier-of test", an accrual basis taxpayer receives income when (1) the required performance occurs, (2) payment therefore is due, or (3) payment therefore is made, whichever happens earliest. 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.” Similar definition of accrual basis accounting is true for financial accounting purposes, except that revenue can't be recognized until it is earned, even if a cash payment has already been received by the tax authorities.

2014

• (Investopedia, 20140 ⇒ http://www.investopedia.com/terms/a/accrualaccounting.asp
  • QUOTE: Accrual accounting is an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows / outflows to be combined with future expected cash inflows / outflows to give a more accurate picture of a company's current financial condition.

2013

• (Accounting Coach, 2013) ⇒ http://www.accountingcoach.com/terms/A/accrual-basis-of-accounting
  • QUOTE: The accounting method under which revenues are recognized on the income statement when they are earned (rather than when the cash is received). The balance sheet is also affected at the time of the revenues by either an increase in Cash (if the service or sale was for cash), an increase in Accounts Receivable (if the service was performed on credit), or a decrease in Unearned Revenues (if the service was performed after the customer had paid in advance for the service).

    Under the accrual basis of accounting, expenses are matched with revenues on the income statement when the expenses expire or title has transferred to the buyer, rather than at the time when expenses are paid. The balance sheet is also affected at the time of the expense by a decrease in Cash (if the expense was paid at the time the expense was incurred), an increase in Accounts Payable (if the expense will be paid in the future), or a decrease in Prepaid Expenses (if the expense was paid in advance).

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