A basis of accounting is the time various financial transactions are recorded. The cash basis
(EU VAT vocabulary ''cash accounting'') and the
accrual basisAccrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabili ...
are the two primary methods of tracking income and expenses in accounting.
Both can be used in a range of situations, from the accounts of a whole country or a large corporation to those of a small business or an individual. In many cases, regulatory bodies require individuals, businesses or corporations to use one method or the other. When this is not the case, the choice of which to use is an important decision, as both methods have advantages and disadvantages.
The accrual method records income items when they are ''earned'' and records deductions when expenses are ''incurred''.
[Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)]
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 testThe all-events test, under Income tax in the United States, U.S. federal income tax law, is the requirement that all the events fixing an accrual-method taxpayer's right to receive income or incur expense must occur before the taxpayer can report an ...
" and "earlier-of test" to determine when income is earned.
[Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)(A); Revenue Ruling 74–607; ]
Under the all-events test, an accrual basis taxpayer generally must include income "for the taxable year when all the events have occurred which fix the right to receive such income and the amount thereof 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 therefor is due, or (3) payment therefor 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.
:''See also Artnell Company v. Commissioner
, US tax ruling on treatment of prepayments.''
Modified cash basis
Also referred to as the modified cash basis, combines elements of both accrual and cash basis accounting. The modified method records income when it is earned but deductions when expenses are paid out. The recording of income is then of accrual basis, while the recording of expenses is cash basis. The modified method does not conform to the GAAP
Accrual Accrual (''accumulation'') of something is, in finance
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Claim of right doctrine
In the tax law of the United States
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In accrual accounting, the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs. And the matching principle instructs that an expense shou ...
The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle
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U.S. tax accounting refers to accounting
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HOA Accounting and Financial Statements Overview
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