In accounting, a basis of accounting is a method used to define, recognise, and report
financial transaction
A financial transaction is an Contract, agreement, or communication, between a buyer and seller to exchange goods, Service (economics), services, or assets for payment. Any transaction involves a change in the status of the finances of two or mo ...
s. The two primary bases of accounting are the cash basis of accounting, or cash accounting, method and the
accrual
In accounting and finance, an accrual is an asset or liability that represents revenue or expenses that are receivable or payable but which have not yet been paid.
In accrual accounting, the term accrued revenue refers to income that is recogni ...
accounting method. A third method, the modified cash basis, combines elements of both accrual and cash accounting.
* The cash basis method records income and expenses when cash is actually paid to or by a party.
* The accrual method records income items when they are earned and records deductions when expenses are incurred.
* The modified cash basis records income when it is earned but deductions when expenses are paid out.
Both methods have advantages and disadvantages, and can be used in a wide range of situations. In many cases, regulatory bodies require individuals, businesses or corporations to use one method or the other.
Comparison
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. Similarly, debts owed by the business are recorded as they are incurred, even if they are paid later.
The accrual basis is a common method of accounting used globally for both financial reporting and taxation. Under accrual accounting, revenue is recognized when it is earned, and expenses are recognized when they are incurred, regardless of when cash is exchanged.
In some jurisdictions, such as the United States, the accrual basis has been an option for tax purposes since 1916.
An "accrual basis taxpayer" determines when income is earned based on specific tests, such as the "
all-events test" and the "earlier-of test".
[Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)(A); Revenue Ruling 74–607; ] However, the details of these tests and the timing of income recognition may vary depending on local tax laws and regulations.
For financial accounting purposes, accrual accounting generally follows the principle that revenue cannot be recognized until it is earned, even if payment has been received in advance.
The specifics of accrual accounting can vary across jurisdictions, though the overarching principle of recognizing revenue and expenses when they are earned and incurred remains consistent.
Modified cash basis
The modified cash basis of accounting, combines elements of both accrual and cash basis accounting.
Some forms of the modified cash basis record income when it is earned but deductions when expenses are paid out. In other words, the recording of income is on an accrual basis, while the recording of expenses is on the cash basis. The modified method does not conform to the
GAAP
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.
See also
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Accrual
In accounting and finance, an accrual is an asset or liability that represents revenue or expenses that are receivable or payable but which have not yet been paid.
In accrual accounting, the term accrued revenue refers to income that is recogni ...
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Accrual accounting in the public sector
Accrual accounting in the public sector is a method to present financial information on government operations.
Under accrual accounting, income and expenditure transactions are recognized when they occur, regardless of when the associated cash ...
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Adjusting entries
In accounting, 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 making adjus ...
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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
In accounting, a deferral is any account where the income or expense is not recognised until a future date.
In accounting, deferral refers to the recognition of revenue or expenses at a later time than when the cash transaction occurs. This c ...
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Matching principle
In accrual basis accounting, the matching principle (or expense recognition principle) dictates that an expense should be reported in the same period as the corresponding revenue is earned. The revenue recognition principle states that revenues ...
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Revenue recognition
In accounting, the revenue recognition principle states that revenues are earned and recognized when they are realized or realizable, no matter when cash is received.
It is a cornerstone of accrual accounting together with the matching princip ...
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Tax accounting
U.S. tax accounting refers to accounting for tax purposes in the United States. Unlike most countries, the United States has a comprehensive set of accounting principles for tax purposes, prescribed by tax law, which are separate and distinct f ...
References
* {{cite web , url=http://www.clarksimsonmiller.com/hoa-accounting-financial-statements-overview/ , title=HOA Accounting and Financial Statements Overview , website=CSM
Personal taxes
Corporate taxation in the United States
Corporate taxation in Canada
Accounting systems
Economics comparisons
Accounting terminology