Chapter 11 Accounting Periods and Methods
Chapter 11 Accounting Periods and Methods
Learning objectives Explain the rules for adopting and changing an accounting period Explain the differences among cash, accrual and hybrid accounting Determine whether specific costs must be included in inventory
Learning Objectives • Explain the rules for adopting and changing an accounting period • Explain the differences among cash, accrual, and hybrid accounting • Determine whether specific costs must be included in inventory
Learning objectives Determine the amount of income to be reported from a long-term contract Compute the gain to be reported from an installment sale Compute the amount of imputed interest in a transaction Determine the tax treatment of duplications and omissions that result from changes of accounting methods
Learning Objectives • Determine the amount of income to be reported from a long-term contract • Compute the gain to be reported from an installment sale • Compute the amount of imputed interest in a transaction • Determine the tax treatment of duplications and omissions that result from changes of accounting methods
Accounting Periods Required payments and fiscal years Returns for periods of less than 12 months May be required to file a short period eturn Must annualize their taxable income
Accounting Periods • Required payments and fiscal years • Returns for periods of less than 12 months – May be required to file a short period return – Must annualize their taxable income
Accounting Periods Generally need IRS approval to change accounting period Business has to establish a substantial business purpose to change accounting period IRS approval is not necessary Conformity between newly married spouses Change to a 52/53 week year ending in the same calendar month as the prior tax year Certain corporation which have not changed accounting periods within 10 years
Accounting Periods • Generally need IRS approval to change accounting period • Business has to establish a substantial business purpose to change accounting period • IRS approval is not necessary – Conformity between newly married spouses – Change to a 52/53 week year ending in the same calendar month as the prior tax year – Certain corporation which have not changed accounting periods within 10 years
Overall Accounting Methods Cash receipts and disbursements method Accrual method Hybrid method
Overall Accounting Methods • Cash receipts and disbursements method • Accrual method • Hybrid method
Cash Receipts And Disbursements Cash receipts and disbursements method Report income for the tax year in which payments are received Expenses deducted in the year paid Most individuals and many service businesses use the cash method
Cash Receipts And Disbursements • Cash receipts and disbursements method – Report income for the tax year in which payments are received – Expenses deducted in the year paid – Most individuals and many service businesses use the cash method
Accrual Method Report income and deduct expenses under the all-events and economic performance test Taxpayers right to receive income and can be determined with reasonable accuracy
Accrual Method • Report income and deduct expenses under the all-events and economic performance test • Taxpayer’s right to receive income and can be determined with reasonable accuracy
Accrual Method Deduction is met when liability is established and the amount of expense can be determined with reasonable accuracy Economic performance occurs when property or services are actually rendered by the other party
Accrual Method • Deduction is met when liability is established and the amount of expense can be determined with reasonable accuracy • Economic performance occurs when property or services are actually rendered by the other party
Hybrid Method Use the accrual method for sales and purchases, but may use cash method for other income and expenses Least used method
Hybrid Method • Use the accrual method for sales and purchases, but may use cash method for other income and expenses • Least used method