Chapter 11
Accounting Periods and
Methods
Learning Objectives
? Explain the rules for adopting and changing
an accounting period
? Explain the differences among cash,accrual,
and hybrid accounting
? Determine whether specific costs must be
included in inventory
Learning Objectives
? Determine the amount of income to be
reported from a long-term contract
? Compute the gain to be reported from an
installment sale
? Compute the amount of imputed interest in a
transaction
? Determine the tax treatment of duplications
and omissions that result from changes of
accounting methods
Accounting Periods
? Required payments and fiscal years
? Returns for periods of less than 12
months
– May be required to file a short period
return
– Must annualize their taxable income
Accounting Periods
? Generally need IRS approval to change
accounting period
? Business has to establish a substantial
business purpose to change accounting
period
? IRS approval is not necessary
– Conformity between newly married spouses
– Change to a 52/53 week year ending in the same
calendar month as the prior tax year
– Certain corporation which have not changed
accounting periods within 10 years
Overall Accounting Methods
? Cash receipts and
disbursements method
? Accrual method
? Hybrid method
Cash Receipts And
Disbursements
? Cash receipts and disbursements
method
– Report income for the tax year in which
payments are received
– Expenses deducted in the year paid
– Most individuals and many service
businesses use the cash method
Accrual Method
? Report income and deduct
expenses under the all-events and
economic performance test
? Taxpayer’s right to receive income
and can be determined with
reasonable accuracy
Accrual Method
? Deduction is met when liability is
established and the amount of
expense can be determined with
reasonable accuracy
? Economic performance occurs
when property or services are
actually rendered by the other
party
Hybrid Method
? Use the accrual method for sales
and purchases,but may use
cash method for other income
and expenses
? Least used method
Inventories
? Determination of
inventory cost
– Lower cost or
market
– LIFO must value
at cost
– Uniform
capitalization
rules
Inventories
? LIFO
– Preferable for tax
purposes
– Record-keeping for
LIFO is difficult
Special Accounting
Methods
? Long-term
contracts
? Installment sales
method
? Deferred payment
sales
Long-term Contract
Accounting Methods
? Completed
contract method
only available
– For contracts
expected to take
less than 2 years
– For certain home
construction
Long-term Contract
Accounting Methods
? Percentage of
completion method
– Reported in each year
of contract based on
estimated percentage
of completed work
– Any taxpayer may use
– Only available for
? Contracts entered
into before July,11
1989
? Certain residential
contracts
Imputed Interest
? Imputed interest
computation
? Accrual of
interest
? Gift,shareholder,
and other loans
Changes In Accounting
Method
? Accounting period is
chosen by using for
the first year in which
it is applicable
– IRS approval is
required to change
methods
– May change to
LIFO method
without IRS
approval
Changes In Accounting
Method
? Amount of change
? Reporting the amount
of change
– The amount
– Change voluntary or
involuntary
– Any specific statutory
mandates
? Obtaining IRS consent
Compliance and Procedural
Considerations
? Installment Sales reported on
Form 6252
? Procedures for changing to LIFO
? Obtaining IRS consent,
Tax Planning
Considerations
? Accounting
periods
? Accounting
methods
? Installment
sales
Accounting Periods and
Methods
Learning Objectives
? Explain the rules for adopting and changing
an accounting period
? Explain the differences among cash,accrual,
and hybrid accounting
? Determine whether specific costs must be
included in inventory
Learning Objectives
? Determine the amount of income to be
reported from a long-term contract
? Compute the gain to be reported from an
installment sale
? Compute the amount of imputed interest in a
transaction
? Determine the tax treatment of duplications
and omissions that result from changes of
accounting methods
Accounting Periods
? Required payments and fiscal years
? Returns for periods of less than 12
months
– May be required to file a short period
return
– Must annualize their taxable income
Accounting Periods
? Generally need IRS approval to change
accounting period
? Business has to establish a substantial
business purpose to change accounting
period
? IRS approval is not necessary
– Conformity between newly married spouses
– Change to a 52/53 week year ending in the same
calendar month as the prior tax year
– Certain corporation which have not changed
accounting periods within 10 years
Overall Accounting Methods
? Cash receipts and
disbursements method
? Accrual method
? Hybrid method
Cash Receipts And
Disbursements
? Cash receipts and disbursements
method
– Report income for the tax year in which
payments are received
– Expenses deducted in the year paid
– Most individuals and many service
businesses use the cash method
Accrual Method
? Report income and deduct
expenses under the all-events and
economic performance test
? Taxpayer’s right to receive income
and can be determined with
reasonable accuracy
Accrual Method
? Deduction is met when liability is
established and the amount of
expense can be determined with
reasonable accuracy
? Economic performance occurs
when property or services are
actually rendered by the other
party
Hybrid Method
? Use the accrual method for sales
and purchases,but may use
cash method for other income
and expenses
? Least used method
Inventories
? Determination of
inventory cost
– Lower cost or
market
– LIFO must value
at cost
– Uniform
capitalization
rules
Inventories
? LIFO
– Preferable for tax
purposes
– Record-keeping for
LIFO is difficult
Special Accounting
Methods
? Long-term
contracts
? Installment sales
method
? Deferred payment
sales
Long-term Contract
Accounting Methods
? Completed
contract method
only available
– For contracts
expected to take
less than 2 years
– For certain home
construction
Long-term Contract
Accounting Methods
? Percentage of
completion method
– Reported in each year
of contract based on
estimated percentage
of completed work
– Any taxpayer may use
– Only available for
? Contracts entered
into before July,11
1989
? Certain residential
contracts
Imputed Interest
? Imputed interest
computation
? Accrual of
interest
? Gift,shareholder,
and other loans
Changes In Accounting
Method
? Accounting period is
chosen by using for
the first year in which
it is applicable
– IRS approval is
required to change
methods
– May change to
LIFO method
without IRS
approval
Changes In Accounting
Method
? Amount of change
? Reporting the amount
of change
– The amount
– Change voluntary or
involuntary
– Any specific statutory
mandates
? Obtaining IRS consent
Compliance and Procedural
Considerations
? Installment Sales reported on
Form 6252
? Procedures for changing to LIFO
? Obtaining IRS consent,
Tax Planning
Considerations
? Accounting
periods
? Accounting
methods
? Installment
sales