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About LinkBacksWhat would be some advantages, to an individual taxpayer, of using the accrual method of accounting?
The only one I can think of would be that bad debts could be written off that would be non-deductible under the cash method.
Using accrual method of accounting for tax purposes
What would be some advantages, to an individual taxpayer, of using the accrual method of accounting?
The only one I can think of would be that bad debts could be written off that would be non-deductible under the cash method.
Accrual method is the most accepted method of accounting and it is as per GAAP. It is something based on conservative principle. Provide for all anticipated losses and do not account income till received. If you provide for anticipated losses, it just makes you prepare for the worst case scenario.
For an individual there are no advantages. If you are talking about an individual who owns a business, then yeah, you do have advantages.
From what I have studied and so far analyzed, accrual accounting makes a whole lot sense then cash accounting. Your books are always reflecting the real value of your business and not underestimating it.
Under the cash method, you record income in the year it is received and expenses in the year they are paid. Under the accrual method, you record income in the year it is earned, regardless of when it is received, and expenses in the year they are incurred, regardless of when they are paid.
The U.S. Internal Revenue Service (IRS) does not require taxpayers to use one method or the other. What the IRS does require is that the method you use must clearly reflect your income and expenses, and enable you to file a correct income tax return.
zahid
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Possible advantage:
Constructing contract payment terms to advance realization of income into subsequent Fiscal Year(s). Ex.: Construction payments due (contingent upon event) in FY 2008 or Jan 1 FY 2009.
I promise to pay UPON COMPLETION OF JOB 1-3 in (next year). Ergo, the contractual obligation to pay clause, with a 'trigger, forestalls (accrual) allocation into subsequent FY.
hello guys,
With the accrual method, transactions are posted on the date they are created, regardless of whether they are paid yet.Example of accrual method: at the end of Oct. you bill for October's care. It is counted as October income, regardless of when the bill is paid.
Accounting Principles...
What are the other accounting principles which should be followed while recording the various transactions of the business.
KH,
Accruals are a means (method), not a principle, used in achieving the accounting principle of matching, which relates to recording assets/liabilities and/or revenues/expenses in the appropriate period.
Besides conservatism (mentioned above) a couple other principles are comparability, materiality, going concern and full disclosure. Google "accounting principles" for others.
For tax purposes most business use the cash basis also but the accrual for book purposes. There are income limits and such where you have to use accrual but otherwise, if you are consistent, most SMALL businesses use cash basis also.
ok. thanks
Robert
Here's another article that illustrates the difference between accrual and cash basis by presenting each method into two different income statements.
difference between accrual basis vs. cash basis accounting
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