Accrual Method and Cash Method

The accounting policy of the enterprise is the basis for the activity of the accounting service on business entities. Therefore, it is extremely important to make the right choice with respect to one or another method of assigning incomes and expenses, so that later there will be no misunderstanding with the fiscal authorities. In the article below, we'll talk about how you can reflect in the accounting results of the operating activities of the enterprise.

The essence and classification of income in the enterprise

According to the current legislation, any profit received by a business entity in the course of its activity is accepted as revenue, and it can be calculated in terms of value in various ways (for this there is a cash method or accruals).

At the same time, there is a category of receipts to the entrepreneur's budget, which is excluded from income items and is not subject to taxation. These include additional taxes (they are also called indirect), representing an added value for the goods, which the buyer covers during the acquisition.

In general, the revenue part is determined by analyzing the primary and tax records, as well as other, confirming the fact of the transaction. In other words, incomes are classified into taxable ones and those that are not subject to the calculation of fiscal collection.

Profit as an object of taxation

It's not a secret that net profit is formed from the total revenue minus a number of mandatory deductions, after which the aggregate income is calculated in different ways (such as, for example, the accrual method and the cash method).

The received amount is subject to taxation and meets the following conditions:

• Financial flows should be the result of implementation activities;
• Revenue is considered received even if it is presented not in cash but in kind.

However, there is also such income, which is considered to be non-operating and accounted for as a result of operating activities. To it it is necessary to carry various kinds of shares, percent from deposits, exchange differences, received penalties, fines and others.

Such income is not subject to taxation in favor of the business entity, such as leased property, loans, as well as contributions to the statutory fund of the enterprise.

Essence and classification of expenses

When it comes to spending, many start-up business entities that do not have experience in entrepreneurial activities think that any operating costs reduce taxable profits. However, this is a delusion. Yes, the expense is a certain amount, expressed in value form and calculated in any convenient way, regulated by law (for example, one of these - the cash method), which can reduce income before tax. However, there are a number of operations that do not have the right to be taken into account for gross results.

Therefore, each expenditure should have an adequate justification, confirm the fact of its fulfillment documented, and also concern the direct activities of the business entity.

Documentation of expenses

For each type of cost, fiscal authorities request a specific list of documents that may differ slightly from the following:

• If this is business trip expenses, an advance report with a confirming certificate, checks for housing and transport is required;
• Transport services - waybills, acts of acceptance and transfer of services rendered;
• Rental of property - settlement documents confirming payment, contracts, acts of acceptance-transfer;
• Mobile communications - contracts, orders for use, details of accounts, a list of authorized employees;
• Maintenance of official service vehicles - track sheets;
• Purchase of drinking water - a certificate from the relevant authorities on the unfitness of local tap water to use, settlement documents.

Variation of costs

So, the costs have already been documented, then they need to be calculated in any convenient way (for example, there is an accrual method and a cash method, which we will talk about a little later), but first let's try to classify the available costs. It should be understood that such can be even if the enterprise does not profit. Therefore, according to the decree of the RF Ministry of Finance, they should not be distributed relative to the revenue side (since they do not always fall into it), but in accordance with their own classification.

There are only two species, and they are easy to remember:

1. Those costs that are subject to taxation (they are non-operating and involved in the production process).
2. Non-taxable costs, in other words - other.

Expenditure as an object of taxation

In order to determine the amount of revenue, you can use the cash method of determining revenue, but if the latter are not on the balance sheet as such, then all attention should be paid to the costs of financial results. As stated above, they can both be taxed, and not - all this is in accordance with the current legislation.

The first can include industrial and sales, material (or, as they are still called, raw materials), labor (staff salaries), depreciation and others.

Expenses that are not subject to taxation are also called normable. Their list is regulated by art. 270 of the Tax Code of the Russian Federation. Among them there may be shortages, hospitality, as well as compensation for personal expenses of employees, which were carried out during business trips.

Cash method: determination and use

Finally, we got to the ways of calculating income and expenses for the reporting period. To begin with, it is necessary to understand that only those operations that are legally subject to accounting are subject to this procedure. Cash method of recognizing income and expenses is based on the average of arithmetic, which is calculated for the entire period in aggregate and takes for its constant the amount of net profit. The latter, as they say in the explanations of the fiscal service, should be less than 1 million rubles a month.

And this means that for the half-year should be a maximum of income - 6 million rubles. How this amount will be distributed remains at the discretion of the business entity. Therefore, it will be quite legal if the entrepreneur does not receive any profit in the first three months, and in the subsequent three months it will amount to 2 million for each reporting period.

Exceptions from the cash method

The cash method has a lot of shortcomings. For starters, as you have already noticed, it has limits on the amount, which means that large business entities having an average revenue of more than 1 million rubles simply can not apply it legislatively. There is a list of institutions that lack such a method of accounting for operating results.

Thus, according to the Tax Code, the cash method for recognizing income and expenses is excluded in its use for the following business representatives:

• Financial institutions engaged in banking;
• Those business entities that participate in the aggregate management of the economy under an agreement on trust management of assets or on a simple partnership.

Accounting revenue by cash method

If an economic entity chooses this way of reflecting its own revenue in the financial results, then it must reflect this in the existing accounting policy of the enterprise and follow it in the future. The cash method of recognizing income and expenses in the income part has a number of features fixed by the current legislation, therefore, their observance is mandatory for any forms of management that are allowed to use this option in accordance with the Tax Code of the Russian Federation:

• The date of recognizing the proceeds is the day on which the funds were credited to the settlement account of the business entity in the bank;
• The condition above also applies to any works and services for the benefit of business that are considered non-property;
• If the enterprise lends to someone, then on the day of their repayment, the income is fully reflected.

In other words, the cash method can be based on actual transactions. Otherwise, the income in favor of the business entity is not recognized.

Expenses for the cash method

As you already understood, with such accounting policy, expenses will be taken into account only if there was a documented fact of their implementation. In the case of a cost part of the balance, the cash method of recognizing income and expenses as a confirmation takes the fact of direct payment and nothing more. The latter also talks about the termination of mutual obligations between counterparties according to the norms specified in the Tax Code of the Russian Federation.

And this means that the cash method of accounting for expenses excludes the attribution to the cost of those payments that are considered to be an advance for services and goods, but have not yet been fulfilled. In this case, the flows for the transaction will be charged to the financial result on the day of shipment of the goods or provision of services under the contract.

Income on accrual basis

If the cash method of income and expenditure recognizes transactions only when they have actually been implemented, then the accrual method, on the contrary, obliges to reflect the liabilities in the financial results on the day of their occurrence, regardless of the actual implementation of the terms of the transaction.

According to the general rule of reflecting the proceeds from the sale, the transaction will be shown in accounting as a result of operating activities on the day of signing the act of providing work and providing goods.

However, there is also a special rule concerning those complex arrangements, the result of which is not reflected in a single reporting period. In this case, the income is reflected uniformly with respect to each fixed period of time, and is regulated by the accounting policy of the enterprise.

Charges for the accrual method

If the cash method of accounting requires actual confirmation of the expenses incurred, the methodology for calculating the costs of the business is somewhat different. The principles of the latter include the following:

• Costs are recorded in the period in which they are documented, regardless of the actual transaction date;
• If the terms of fulfillment of obligations are specified in the terms of the agreement, they fall into the financial result, otherwise the taxpayer can determine them at his own discretion;
• The principles referred to in the paragraph above also apply to those forms of contracts that specify only the payment framework, but nothing is said about the shipment of goods and the provision of services;
• If expenses can not be classified and attributed to any place of occurrence of costs, then their aggregate amount is distributed evenly relative to the entire revenue side.