An accounting method is a set of rules used to determine when and how income and expenses are reported on your U.S. company tax return. The accounting method includes not only the company’s overall method of accounting, but also the accounting treatment the company use for any material item. The U.S. company chooses an accounting method when it file first tax return. If you later want to change your accounting method, you must get IRS approval.
No single accounting method is required of all taxpayers. Your U.S. company must use a system that clearly reflects the company’s income and expenses and the U.S. company must maintain records that will enable you to file a correct return. In addition to the permanent accounting books, the U.S. company must keep any other records necessary to support the entries on accounting books and tax returns.
Generally, you can figure your taxable income under accrual method, cash method, special methods of accounting for certain items of income and expenses, or a hybrid method which combines elements of two or more of the above accounting methods. Here we will introduce more on the accrual method.
Under an accrual method of accounting, your U.S. company generally report income in the year it is earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.
Generally, your U.S. company include an amount in gross income for the tax year in which all events that fix your right to receive the income have occurred and the U.S. company can determine the amount with reasonable accuracy. Under this rule, the U.S. company reports an amount in the company’s gross income on the earliest of the following dates.
When the company receives payment.
When the income amount is due to the company.
When the company earns the income.
When title passes.
Generally, your company reports an advance payment for goods, services or other items as income in the year you receive the payment. However, if the company uses an accrual method of accounting, you can elect to postpone including the advance payment in income until the next year. However, you cannot postpone including any payment beyond that tax year.
Under an accrual method of accounting, a company generally deduct or capitalize a business expense when both the following apply.
The all-events test has been met. The test is met when:
(1) All events have occurred that fix the fact of liability, and
(2) The liability can be determined with reasonable accuracy.
Economic performance has occurred.
Generally, the company cannot deduct or capitalize a business expense until economic performance occurs. If your expense is for property or services provided to the company, or for the company’s use of property, economic performance occurs as the property or services are provided or the property is used. If the company’s expense is for property or services you provide to others, economic performance occurs as your company provide the property or services.
Disclaimer
All information in this article is only for the purpose of information sharing, instead of professional suggestion. Kaizen will not assume any responsibility for loss or damage.
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