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McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick
Edition 3ISBN: 9780077924522McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick
Edition 3ISBN: 9780077924522 Exercise 2
Compare and contrast the rules for determining the tax treatment of advance payments for services versus advance payments for goods.
Explanation
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Accounting Periods:
Accounting periods plays an important role in the tax liability determination.The account period has been defined by IRS.The accounting period could not be larger than 12-month periods.
Following are the type of accounting periods: -
(1)A calendar year which ends on 31 st December every year.
(2)A fiscal year which ends on the last date of a month other than December.
(3)A 52/53-week year end on the same day if the week every year.
A full tax year is a 12-month period but, a short tax year has a period of lesser than 12 months.A new business or a closing business may have a short tax year.
Accrual Basis:
Under the accrual basis of accounting revenue is recognized under revenue recognition, unlike cash basis which recognizes income or expense based on the actual cash receipt and payments.
All event test for income states that the income would be recorded only if (1)the all event occurred which would entitle the entity to ask for money from its' client and (2)the amount in transaction has been determined with reasonable accuracy.If any of the all event test criteria is not met then, revenue recognition would be suspended.The advance payment for services may be deferred till next period.The deferral to the next period is not allowed if (1)the service has been performed partly during the current taxable year, (2)if the prepayment has been included in the financial income, or (3)if the prepayment was for interest or rent.
The rule for recognizing rental and interest income is different from other incomes.Rental income is necessarily recognized when the prepaid or advance income is received (upon receipt).
The advance received from a customer for good could be recorded under the full inclusion method or deferral method.Advance received from a customer is not recorded as an income upon the receipt of the advance money.The rule for recording advance from customer is lesser strict.
Accounting periods plays an important role in the tax liability determination.The account period has been defined by IRS.The accounting period could not be larger than 12-month periods.
Following are the type of accounting periods: -
(1)A calendar year which ends on 31 st December every year.
(2)A fiscal year which ends on the last date of a month other than December.
(3)A 52/53-week year end on the same day if the week every year.
A full tax year is a 12-month period but, a short tax year has a period of lesser than 12 months.A new business or a closing business may have a short tax year.
Accrual Basis:
Under the accrual basis of accounting revenue is recognized under revenue recognition, unlike cash basis which recognizes income or expense based on the actual cash receipt and payments.
All event test for income states that the income would be recorded only if (1)the all event occurred which would entitle the entity to ask for money from its' client and (2)the amount in transaction has been determined with reasonable accuracy.If any of the all event test criteria is not met then, revenue recognition would be suspended.The advance payment for services may be deferred till next period.The deferral to the next period is not allowed if (1)the service has been performed partly during the current taxable year, (2)if the prepayment has been included in the financial income, or (3)if the prepayment was for interest or rent.
The rule for recognizing rental and interest income is different from other incomes.Rental income is necessarily recognized when the prepaid or advance income is received (upon receipt).
The advance received from a customer for good could be recorded under the full inclusion method or deferral method.Advance received from a customer is not recorded as an income upon the receipt of the advance money.The rule for recording advance from customer is lesser strict.
McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick
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