Basis of accounting

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A basis of accounting can be defined as the time various financial transactions are recorded. The cash basis (EU VAT vocabulary Cash accounting) and the accrual basis are the two primary methods of tracking income and expenses in accounting.

Both can be used in a range of situations from the accounts of a whole country,[1] a large corporation, a small business or an individual. In many cases regulatory bodies may require individuals, businesses or corporations use one method or the other. When this is not the case, the choice of which to use is an important decision as both have advantages and disadvantages.[2][3]

Accrual basis[edit]

The accrual method records income items when they are earned and records deductions when expenses are incurred.[4] 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 – and debts owed by the business show as they are incurred, even though they may not be paid until much later.

In the United States tax environment, the accrual basis has been an option since 1916.[4] An "accrual basis taxpayer" looks to the "all-events test" and "earlier-of test" to determine when income is earned.[5] 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."[5] 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.[6] 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."[7]

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.[8]

Modified accrual basis[edit]

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 GAAP. [9]

See also[edit]

References[edit]

  1. ^ "Measuring the Deficit: Cash vs. Accrual". Government Accountability Office. Retrieved 19 January 2011. 
  2. ^ "Cash vs. Accrual Accounting", Inc.com
  3. ^ "Measuring the Deficit: Cash vs. Accrual", GAO.gov
  4. ^ a b Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)
  5. ^ a b Treas. Reg., 26 C.F.R. § 1.446-1(c)(1)(ii)(A); Revenue Ruling 74-607
  6. ^ Revenue Ruling 74-607
  7. ^ Treas. Reg., 26 C.F.R. § 1.461-1(a)(2)(i)
  8. ^ "What are Accruals and the Meaning of Accrued in Accounting?". Simplestudies LLC. 25 February 2010. Retrieved 25 February 2010. 
  9. ^ Ernst, James. "3 Methods of HOA Accounting and How They Effect Financial Statements". www.echo-ca.org. ECHO. Retrieved August 5, 2014. 

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Any businesses in Australia with a turnover higher than the minimum threshold (75,000 dollars per annum) are required to register for GST; however, it is not a must for businesses with a lower threshold than the minimum to do so. Australian Business Number (ABN): ABN refers to a unique number that has 11 digits that businesspersons utilize when dealing with other businesspersons; applying for ANB is free. One may apply for an ABN or rather access and update his or her details online A bookkeeper can consult an accountant on insurance issues; help set up both bookkeeping and account systems in order to facilitate the evaluation of profitability and modification of prices. They can further help you in tax planning and compliance. Planning help you reduce the overall burden whereas compliance helps you obey and adhere to business-related laws. 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In other words, GST is generally payable on the value added at each and every stage of the commercial chain as far as dealings with goods, services, and other supplies are concerned. Activity 9 Monthly: appropriate for businesses with a GST turnover of 20 million dollars or more. They are also required to lodge their activity statement in an electronic manner. Other business are also not prohibited to report GST on a monthly basis Quarterly: a businessperson can utilize this method to report and pay if his GST turnover is less than 20 million dollars and he has not been told to report GST monthly. Annually: businesses can opt report and pay and claim GST credits on annual basis if they are voluntarily registered for GST and they have not made any election to pay GST by installments. However, businesses have a limited period every year for making this choice Appropriate persons as identified by the statutory, legislative, and regulatory requirements oversee the checking and signing off of activity statement Activity 13 GST was introduced and ATO introduced the Business Activity Statement (BAS). Following this, businesses were required to make monthly or quarterly reports on their FNT, GST, PAYG, and provisional tax obligations. Bookkeepers’ role shifted to preparing the BAS and keeping books. The legislation also saw the definition of a BAS Service as a service provided in the event where an entity rely on the service in a reasonable manner Activity 15 Several adjustments may be made; they include, cancelling of a taxable purchase or sale; making changes in creditable purpose, and changing of price of a taxable purchase or sale. Unclaimed GST credits may be claimed on any future BAS within the four year time limit. Other corrections that reduce GST payable may be made on the current BAS; these corrections are based on the limit defined with reference to the annual turnover of a business. Also, other corrections may be made that increase payable on correct BAS and they are subject to the timing of the correction ATO timelines to rectify the errors on BAS or IAS include payment and lodgment concessions when a person lodge eligible quarterly BAS in an electronic manner as well as a lodgment concession for pay as you go (PAYG) withholding summary reports that is annually based Activity 16 You enter a payment to the ATO by going to the Command Centers; choose Banking command then Spend Money command You enter a refund (credit) from the ATO through the banking command via the Receive Money function. The allocation accounts will be similar to those for the payment to the ATO.