Accrual and cash basis

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The accounting policy of an enterprise is the basis of the activities of the accounting service at business entities. Therefore, it is extremely important to make the right choice regarding one or another method of allocating income and costs, so that later there will be no misunderstandings with the fiscal authorities. In the article below, we will talk about how the results of the enterprise's operating activities can be reflected in accounting.

Essence and classification of income in the enterprise

According to the current legislation, any profit that a business entity receives in the course of its activities, and which can be calculated in terms of value in various ways (there is a cash method or accruals) is accepted as income.

At the same time, there is a category of revenues to the entrepreneur's budget, which is excluded from income items and is not subject to taxation. These shouldinclude additional taxes (they are also called indirect), representing the added value of the goods, which is covered by the buyer upon purchase.

In general, the income side is determined by analyzing the primary and tax accounting documents, as well as others confirming the fact of the completed transaction. In other words, income is classified into taxable and those that are not subject to the calculation of the fiscal fee.

Profit as an object of taxation

It's no secret that net income is formed from the total revenue minus a number of mandatory deductions, after which the total income is calculated in various ways (such as, for example, the accrual method and the cash method).

The amount received is taxable 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. It should include various kinds of shares, interest on deposits, exchange differences, received fines, pen alties and others.

Not subject to taxation are such receipts in favor of a business entity as leased property, loans, as well as contributions to the authorized capital of an enterprise.

Essence and classification of expenses

When it comes to spending, many start-up businesses don'tthose with business experience think that any operating costs reduce taxable income. However, this is misleading. Yes, an expense is a certain amount, expressed in value terms and calculated in any convenient way regulated by law (for example, one of these is the cash method), by which income before tax can be reduced. However, there are a number of transactions that are not eligible for gross results.

Therefore, each expense must have an adequate justification, document the fact of its completion, and also relate to the direct activities of the business entity.

Documentation of expenses

For each type of expenditure, the fiscal authorities request a specific list of documents, which may slightly differ from the one below:

• if these are travel expenses, then an advance report is required with a confirming certificate, checks for housing and transport;
• transport services - waybills, acts of acceptance and transfer of services rendered;
• property rental - settlement documents confirming payment, contracts, transfer and acceptance certificates;
• mobile communications – contracts, usage orders, billing details, list of authorized employees;
• exploitation of utility vehicles - waybills;
• purchase of drinking water - a certificate from the relevant authorities on the unsuitability of loc altap water for consumption, settlement documents.

Varieties of expenses

So, the expenses have already been documented, after which they must be calculated in any convenient way (for example, there is an accrual method and a cash method for this, which we will talk about a little later), but first, let's try to classify the existing costs. It should be understood that these can be even if the enterprise has no profit. Therefore, according to the decree of the Ministry of Finance of the Russian Federation, they should be distributed not in relation to the revenue side (since they do not always fall on it), but in accordance with their own classification.

There are only two varieties, 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. Tax-free costs, in other words, other.

Expense as an object of taxation

In order to determine the amount of revenue, you can use the cash method of determining income, but if the latter are absent in the balance sheet as such, then all attention should be paid to expenses when summarizing financial results. As mentioned above, they may or may not be taxed - all this in accordance with applicable law.

The first ones include production and sales, material (or, as they are still acceptedcall, raw materials), labor (wages of employees), depreciation and others.

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

Cash method: definition and features of use

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

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

Exceptions from cash method

The cash method has a lot of disadvantages. To begin with, as you have already noticed, it has limits on the amount, which means that large business entities with an average revenue of more than 1 million rubles,simply cannot be legally enforced. There is a list of institutions that are deprived of this method of accounting for the results of operations.

So, according to the Tax Code of the Russian Federation, the cash method of recognition of income and expenses is excluded in its use for the following business representatives:

• financial institutions involved in banking activities;
• those business entities that take part in the overall management of the economy in accordance with the concluded agreement on trust management of assets or on a simple partnership.

Cash income accounting

If a business entity has chosen this method of reflecting its own revenue in the financial results, then it is obliged to reflect this in the current accounting policy of the enterprise and follow it in the future. The cash method of recognizing income and expenses in the incoming part has a number of features enshrined in the current legislation, therefore, their observance is mandatory for any form of business that is allowed to use this accounting option in accordance with the Tax Code of the Russian Federation:

• the date of recognition of the receipt is the day on which the funds were credited to the current account of the business entity in the bank;
• the above condition also applies to any works and services for the benefit of the business that are considered non-property;
• if the company provided loans to someone, then on the day of their repayment, income is also reflected in full.

In other words, the cash method can be basedon actual transactions. Otherwise, receipts in favor of the business entity are not recognized.

Cash expenses

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

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

Income under the accrual method

If the cash method of income and expenses recognizes transactions only when they have actually taken place, then the accrual method, on the contrary, obliges to reflect liabilities in the financial results on the day they occur, regardless of the actual implementation of the terms of the transaction.

According to the general rule of reflection of proceeds from sales, the transaction will be shown in the accounting as a result of operating activities on the day the act on the provision of work and the provision of goods is signed.

But there isalso a special rule concerning those complex arrangements, the result of which cannot be reflected in one reporting period. In this case, income is reflected evenly with respect to each fixed period of time, and this is regulated by the accounting policy of the enterprise.

Accrual expenses

If the cash method of accounting requires actual confirmation of the costs incurred, then with the accrual method for costs, things are somewhat different. The principles of the latter include the following:

• costs are recorded in the period to which they are documented, regardless of the date of the actual transaction;
• if the terms of fulfillment of obligations are specified in the terms of the contract, they fall into the financial result, otherwise the taxpayer can determine them at his discretion;
• principles mentioned in paragraph above also apply to those forms of contracts that specify only the scope of payment, but say nothing about the shipment of goods and the provision of services;
• if expenses cannot be classified and attributed to any cost center, then their total amount is distributed evenly over the entire revenue side.