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A basis of accounting is the time various financial transactions are recorded. The cash basis (EU VAT vocabulary ''cash accounting'') and the
accrual basis Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. Accruals in accounting For example, a company delivers a product to a customer who will pay for it 30 days l ...
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.


Accrual basis

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 test" 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 cannot 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, U.S. 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
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See also

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Accrual Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment ...
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Adjusting entries In accounting/accountancy, adjusting entries are journal entries usually made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred. The revenue recognition principle is the basis of m ...
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Claim of right doctrine In the tax law of the United States the claim of right doctrine causes a taxpayer to recognize income if they receive the income even though they do not have a fixed right to the income. For the income to qualify as being received there must be a ...
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Deferral A deferral, in ''accrual accounting'', is any account where the income or expense is not recognised until a future date (accounting period), e.g. annuities, charges, taxes, income, etc. The deferred item may be carried, dependent on type of ...
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Matching principle In accrual accounting, the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting and the revenue recognition principle states tha ...
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Revenue recognition The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are reco ...
* Tax accounting


References

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HOA Accounting and Financial Statements Overview
* Personal taxes * Corporate taxation in the United States * Corporate taxation in Canada * Accounting systems * Economics comparisons * Accounting terminology