Accounting Method


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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  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. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  3. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  4. How much working capital does a small business need?

    The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
  5. What does high working capital say about a company's financial prospects?

    If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>
  6. How can working capital affect a company's finances?

    Working capital, or total current assets minus total current liabilities, can affect a company's longer-term investment effectiveness ... Read Full Answer >>

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