Accrual method reports the revenues in the period in which they are earned and expenses are reported in the period in which they are incurred in an attempt to produce revenues. For example, revenue would be recognized when the supplies are used and not when the cash is paid for the supplies purchased. The accrual basis of accounting requires the use of an adjusting process at the end of the accounting period to match revenues and expenses for the period properly. The matching principle is closely liked to accrual accounting and to revenue recognition. The matching principle states that to determine the earning of a company for an accounting period the total expenses involved in obtaining the revenues for that period must be computed and related to (matched against) the revenues recorded in the same period. The intent is to match the sacrifices against the benefits – that is the efforts against the accomplishments – in the appropriate accounting period.
You generally include an amount as income for the tax year in which all events have occurred that fix you right to receive the income and you can determine the amount with reasonable accuracy.
In accrual method you must use an inventory to figure your gross income. These show increases in inventory values of livestock, produce, feed, etc., between the beginning of the year and the end of the year. A complete inventory of these items is required for reporting income on an accrual method.
To figure gross income on an accrual method you should do the following:
1) Add the following items:
2) Then subtract the total of the following items:
They are generally deducted or capitalized as an expense in the tax year in which the following apply:
Generally you cannot deduct or capitalize a business expense until economic performance occurs. If expense is used for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or the property is used. If the expenses for property or services that are provided to other economic performance occurs as that property or service is provided.
Some small companies do not use accrual accounting and matching. Instead they use cash basis accounting. In cash basis, which is generally what the Ag community uses, the earning of a company for an accounting period are computed by subtracting the cash payments from the cash receipts for an operation. This method may lead to incorrect evaluations of a company’s operating results because the receipt and payment of cash may occur much earlier or much later than the actual sale of the goods or the providing of the services to their customers (benefits) and the related costs (sacrifices).