Acrual Method Accounting

Under the accrual method, you record business income when a sale occurs, whether it is the delivery of a product or the rendering of a service on your part, regardless of when you get paid. You record an expense when you receive goods or services, even though you may not pay for them until later.

To be more precise, under the accrual method you recognize an item of income when all the events that establish your right to receive the income have happened, and when the amount of income you are to receive is known with reasonable accuracy. If you estimate an amount due to you with reasonable accuracy and record it as income, and the amount you eventually receive differs from your estimate, you should make an adjustment to your income in the year you actually receive the payment.

The accrual method also says that you recognize an item of expense when you become liable for it, whether or not you pay for it in the same year. Becoming liable means that all events have occurred that establish your obligation, you can determine the dollar amount with reasonable accuracy, and "economic performance" has occurred. Economic performance means that the property or services have been provided or the property has been used.