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{{redirect|Accounting method|the computer science method|Accounting method (computer science)}}
{{Use dmy dates|date=October 2013}}
{{Short description|The time when financial transactions are reported}}
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{{Expert-subject|Business/AccountingUse taskdmy forcedates|date=JanuaryOctober 2013}}{{Accounting}}
In [[accounting]], a '''basis of accounting''' is a method used to define, recognise, and report [[Financial transaction|financial transactions]].<ref>{{Cite web |title=California Department of General Services |url=https://www.dgs.ca.gov/en/Resources/SAM/TOC/7400/7440 |access-date=2024-09-10 |website=www.dgs.ca.gov}}</ref> The two primary bases of accounting are the [[cash basis of accounting]], or cash accounting, method and the [[accrual]] accounting method. A third method, the modified cash basis, combines elements of both accrual and cash accounting.
{{Accounting}}
A '''basis of accounting''' can be defined as the time various financial transactions are recorded. The [[Cash method of accounting|cash basis]] (EU VAT vocabulary ''Cash accounting'') and the [[accruals|accrual basis]] are the two primary methods of tracking income and expenses in accounting.
 
* The cash basis method records income and expenses when cash is actually paid to or by a party.
Both can be used in a range of situations, from the accounts of a whole country,<ref>{{cite web |url=http://www.gao.gov/special.pubs/longterm/deficit/ |title=Measuring the Deficit: Cash vs. Accrual |publisher=[[Government Accountability Office]] |accessdate=19 January 2011}}</ref> a large corporation, 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.<ref>[http://www.inc.com/articles/2000/04/19194.html "Cash vs. Accrual Accounting"], Inc.com</ref><ref>[http://www.gao.gov/special.pubs/longterm/deficit/ "Measuring the Deficit: Cash vs. Accrual"], GAO.gov</ref>
* 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,<ref>[http://www.inc.com/articles/2000/04/19194.html "Cash vs. Accrual Accounting"], Inc.com</ref><ref>[http://www.gao.gov/special.pubs/longterm/deficit/ "Measuring the Deficit: Cash vs. Accrual"] {{Webarchive|url=https://web.archive.org/web/20131015143121/http://www.gao.gov/special.pubs/longterm/deficit/|date=15 October 2013}}, GAO.gov</ref> and can be used in a wide range of situations.<ref>{{cite web |title=Measuring the Deficit: Cash vs. Accrual |url=http://www.gao.gov/special.pubs/longterm/deficit/ |url-status=dead |archive-url=https://web.archive.org/web/20131015143121/http://www.gao.gov/special.pubs/longterm/deficit/ |archive-date=15 October 2013 |access-date=19 January 2011 |publisher=[[Government Accountability Office]]}}</ref> In many cases, regulatory bodies require individuals, businesses or corporations to use one method or the other.
 
== Comparison ==
{| class="wikitable"
|+Comparison of accounting bases
!Scenario
!Overview
!Cash accounting
!Accrual accounting
|-
|The company has received advance payment for obligations they have yet to perform
|Paid but unearned revenue
|Cash paid is recognised as income
|Cash paid to company is recognised as deferred income, a form of liability
|-
|The company has made advance payment for obligations the other party has yet to perform
|Paid but unearned expenses
|Cash paid is recognised as expenses
|Cash paid by company is recognised as deferred expenses, a form of asset
|-
|The company has already performed obligations but have yet to be paid
|Earned but unpaid revenue
|No revenue is recognised until cash is paid
|Cash paid is recognised as accrued income, a form of asset
|-
|The company has not yet paid for obligations already performed
|Earned but unpaid expenses
|No revenue is recognised until cash is paid
|Cash paid is recognised as accrued expenses, a form of liability
|}
 
==Accrual basis==
The accrual method records income items when they are ''earned'' and records deductions when expenses are ''incurred''.<ref name=AccrualDef>Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)</ref> 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. – andSimilarly, debts owed by the business showare recorded as they are incurred, even thoughif they may not beare paid until much later.<ref>{{Cite web|title = Accrual Accounting Definition {{!}} Investopedia|url = http://www.investopedia.com/terms/a/accrualaccounting.asp?adtest=term_page_v14_v1|accessdate access-date= 2015-10-07|last = root}}</ref>{{fact|date=March 2015}}
 
Similar definition ofThe accrual basis is a common method of accounting isused trueglobally for both financial accountingreporting purposes,and excepttaxation. thatUnder revenueaccrual can'taccounting, berevenue is recognized untilwhen it is earned, evenand ifexpenses aare cashrecognized paymentwhen hasthey alreadyare beenincurred, receivedregardless byof thewhen taxcash is authoritiesexchanged.<ref name="accrual-basis-accounting">{{cite web|title=What are Accruals andis the Meaningmeaning of Accruedaccrued in Accountingaccounting? |url=http://simplestudies.com/accruals-meaning-of-accrued-in-accounting.html|publisher=Simplestudies LLC|date=25 February 2010|access-date=25 February 2010}}</ref>▼
In the United States tax environment, the accrual basis has been an option since 1916.<ref name=AccrualDef /> An "accrual basis taxpayer" looks to the "[[all-events test]]" and "earlier-of test" to determine when income is earned.<ref name=tests>Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)(A); Revenue Ruling 74-607</ref> Under the all-events test, an accrual basis taxpayer generally must include income "for the taxable year when all the events have occurred that fix the right to receive income and the amount of the income can be determined with reasonable accuracy."<ref name=tests /> Under the "earlier-of test", an accrual basis taxpayer receives income when (1) the required performance occurs, (2) payment therefore is due, or (3) payment therefore is made, whichever happens earliest.<ref>Revenue Ruling 74-607</ref> 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."<ref>Treas. Reg., 26 C.F.R. § 1.461-1(a)(2)(i)</ref>
 
In some jurisdictions, such as the United States, the accrual basis has been an option for tax purposes since 1916.<ref name=AccrualDef /> An "accrual basis taxpayer" determines when income is earned based on specific tests, such as the "[[all-events test]]" and the "earlier-of test".<ref name=tests>Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)(A); Revenue Ruling 74–607; {{cite court |litigants=Flamingo Resort, Inc. v. United States |vol=664 |reporter=F.2d |opinion=1387 |court=9th Cir. |date=1982 |url=https://law.justia.com/cases/federal/appellate-courts/F2/664/1387/198285/ |access-date=2018-01-10 }}</ref> However, the details of these tests and the timing of income recognition may vary depending on local tax laws and regulations.
▲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.<ref name="accrual-basis-accounting">{{cite web|title=What are Accruals and the Meaning of Accrued in Accounting?|url=http://simplestudies.com/accruals-meaning-of-accrued-in-accounting.html|
publisher=Simplestudies LLC|date=25 February 2010|accessdate=25 February 2010}}</ref>
 
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.<ref name="accrual-basis-accounting" /> 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.<ref>{{cite book |title=International Accounting |last=Choi |first=Frederick |publisher=Pearson |year=2012 |isbn=978-0132568968}}</ref>
== 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 they are 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 [[Generally accepted accounting principles|GAAP]]. <ref>{{cite web|last1=Ernst|first1=James|title=3 Methods of HOA Accounting and How They Effect Financial Statements|url=http://www.echo-ca.org/article/3-methods-hoa-accounting-and-how-they-effect-financial-statements|website=www.echo-ca.org|publisher=ECHO|accessdate=5 August 2014|ref=3 Methods of HOA Accounting and How They Effect Financial Statements}}</ref>▼
▲== Modified Cashcash Basisbasis ==
The modified cash basis of accounting, combines elements of both accrual and cash basis accounting.
 
▲AlsoSome referredforms to asof the Modified Cash Basis, combines elements of both accrual andmodified cash basis accounting. The modified method recordsrecord income when theyit areis earned but deductions when expenses are paid out. TheIn other words, the recording of income is thenon ofan accrual basis, while the recording of expenses is on the cash basis. The modified method does not conform to the [[Generally accepted accounting principles|GAAP]]. <ref>{{cite web|last1=Ernst|first1=James|title=3 Methods of HOA Accounting and How They Effect Financial Statements|url=http://www.echo-ca.org/article/3-methods-hoa-accounting-and-how-they-effect-financial-statements |websitepublisher=ECHO|access-date=5 August 2014 |url-status=dead |archive-url=https://web.archive.org/web/20140808054841/http://www.echo-ca.org/article/3-methods-hoa-accounting-and-how-they-effect-financial-statements |publisherarchive-date=ECHO|accessdate=5 AugustAug 8, 2014 |ref=3 Methods of HOA Accounting and How They Effect Financial Statements}}</ref>
 
==See also==
* [[Accrual]]
* [[Accrual accounting in the public sector]]
* [[Adjusting entries]]
* [[Claim of right doctrine]]
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== References ==
{{reflist}}
[* {{cite web |url=http://www.clarksimsonmiller.com/hoa-accounting-financial-statements-overview/ |title=HOA Accounting and Financial Statements Overview] |website=CSM}}▼
 
* [[Category:Personal taxes]]
* [[Category:Corporate taxation in the United States]]
*[[Category:AccountingCorporate systemstaxation in Canada]]
* [[Category:EconomicsAccounting comparisonssystems]]
* [[Category:AccountingEconomics terminologycomparisons]]
* [[Category:Accounting terminology]]
 
▲[http://www.clarksimsonmiller.com/hoa-accounting-financial-statements-overview/ HOA Accounting and Financial Statements Overview]
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