Accrual basis accounting recognizes income when the right to it is fixed and the amount determinable (the all-events test), and deducts expenses when the liability is fixed and economic performance has occurred, regardless of when cash moves. It gives a truer picture of profitability, matching revenue with the costs of producing it, which is why GAAP financial statements, lenders, and investors demand it. For tax, accrual is mandatory for C corporations and partnerships with C corporation partners above the gross receipts threshold (around $30 million, indexed). The tax cost is real: accrual businesses pay tax on receivables before collecting the cash, though a special rule defers advance payments for one year and bad debts are deductible when receivables go uncollectible. Many businesses run accrual books for management and GAAP purposes while filing tax returns on the cash method, reconciling the difference on Schedule M-1 or M-3.
Accrual Basis Accounting
Primary authority: IRC §446(c)(2); §451
The authority behind it
IRC §446(c)(2); §451
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
An accrual basis firm bills $200,000 in December and collects it in February. The $200,000 is taxable income in the December year; the offsetting payroll incurred in December is deductible the same year even if paid in January.
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