About 'accrual accounting system'|ACCOUNTING SYSTEM IN HINDU ARTHA SASTRA
According to the IRS, most individuals and many small businesses use the cash method for tax purposes. According to this method, income is reported in the tax year it is received and expenses are reported in the tax year they are paid. The other method is the accrual method, in which income is reported in the year it is earned, regardless of when it is received, and expenses are reported in the year incurred, regardless of when they are paid. The method of payment sometimes leads to confusion when using the cash method. For example, if you pay for a tax-deductible expense with a credit card in December, and you pay the credit card bill in January, in which year do you claim the deduction? If you claim an itemized deduction for medical expenses or charitable contributions, for example, the IRS points out that if you pay the expense by check, the day you mail or deliver the check is generally the date of payment. This may affect payments you make by check at the end of the year. For example if you date a check the 30th of December but do not mail it until January 2nd, the date of payment for tax purposes would be in January. If you use a pay by phone system or pay an expense online, the payment date would be the date reported on the statement from your bank or financial institution. So the date you schedule the payment could determine the tax year in which you can deduct the expense. If you pay by credit card the payment date for tax purposes is the date the charge is made, and not the date on which you pay the credit card bill. So deductible expenses you charge to your credit card in December are deductible that year, even though you pay the credit card bill in January. If you qualify for one of the tax benefits for education, which include the American opportunity credit, the lifetime learning credit, or the tuition and fees deduction, you can claim qualified education expenses you paid with the proceeds of a loan. According to the IRS, you can claim the expenses in the year they are paid, not the year the loan is paid. Loan payments that are sent directly to the education institution are treated as paid on the date the institution credits the student's account. You should keep in mind that you may also qualify for the student loan interest deduction when you start paying the loan. Sources: Publication 502, Medical and Dental Expenses, IRS Publication 526, Charitable Contributions, IRS Publication 538, Accounting Periods and Methods, IRS Publication 970, Tax Benefits for Education, IRS |
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