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Simple English definitions for legal terms
accrual accounting method
Read a random definition: Plyler v. Doe
A quick definition of accrual accounting method:
The accrual accounting method is a way of keeping track of money for taxes. It records when a debt or expense happens, rather than when the money is received or paid out. This is different from the cash-basis accounting method, which only counts money that has been received or paid out. Other accounting methods include cost accounting, fair-value accounting, and percentage-of-completion method.
A more thorough explanation:
The accrual accounting method is a system used to determine income and expenses for tax purposes. It records entries of debits and credits when the liability arises, rather than when the income or expense is received or disbursed. This is also known as the accrual basis.
- Cash-basis accounting method: This is an accounting method that considers only cash actually received as income and cash actually paid out as an expense. For example, if a business receives payment for a service in January but doesn't provide the service until February, the income would be recorded in February under the accrual accounting method, but in January under the cash-basis accounting method.
- Percentage-of-completion method: This is an accounting method in which revenue is recognized gradually during the completion of the subject matter of the contract. For example, if a construction company is building a house for a client, revenue would be recognized as the project progresses, rather than all at once when the project is completed.
These examples illustrate how the accrual accounting method differs from other accounting methods, such as the cash-basis accounting method. The accrual accounting method focuses on when the liability arises, rather than when the income or expense is received or disbursed.