By: Alicia Pepitone, Mohil Shah and Tillie Richardson
Team Learning Summary
According to IRS, "Cash and accrual based accounting both have general rules of putting in the gross income. With cash you must also enter property and services at their fair market value. Accrual is the income for the tax year that all events of income occurred. Accrual based accounting have special rules for income, which include: -keep an eye on estimated income.
-change in payment schedule for services must be entered in at a basic rate until the service is completed and payment is received minus the difference. -Advance payments for services, you generally report advance payments that are performed in a later tax year, but you can't postpone including the payment beyond that tax year" (publication 334, IRS). Expenses:
Cash- deduct expenses the year you pay them. You may be required to capitalize certain costs. Accrual - deduct or capitalize 1. When all events have occurred that fix the fact of liability and liability is determined with reasonable accuracy. 2. Economic performance has occurred. It is all in how you record cash transactions. “Adjusting entries ensure that revenue recognition and matching principles are followed (Kimmel P. 3.4).” Revenue recognition means that revenue should be recognized at the time the revenue was earned. Matching principle is when the expense that was put into making that revenue is recognized when the revenue occurs. Adjusting entries are important because when making a trial balance at any time it is not a for sure that all the entries are up to date so adjusting is required. Adjusting entries are either made in the deferrals section or accruals. Deferrals are when cash is given or received but the work for the cash has not been done. Accruals are when cash is when work is done but cash is not sent or received. Adjusting...