Accounting Method

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DEFINITION of 'Accounting Method'

The method by which income and expenses are reported for taxation purposes. The Internal Revenue Service requires taxpayers to choose an accounting method that accurately reflects their income and to be consistent in their choice of accounting method from year to year. IRS approval is required to change methods. The chosen accounting method is based on regulation and tax minimization strategies.

BREAKING DOWN 'Accounting Method'

The two primary accounting methods in North America are cash and accrual accounting. Cash accounting reports income and expenses in the year they are received and paid; accrual accounting reports income and expenses in the year they are earned and incurred.

Cash, accrual, special and hybrid methods are all allowable choices if specified requirements are met.

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RELATED FAQS
  1. How does accrual accounting differ from cash basis accounting?

    The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. ... Read Full Answer >>
  2. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  3. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
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    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

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