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Incurred Accounting and How It Works

There are two main methods that are used to calculate the taxable income of an entity. These methods are the accrual accounting and the cash accounting. According to the general rule the tax payer has to compute his taxable income by using the same method that he uses to compute his income while maintaining the books. Another important fact that needs to be noted is that the taxpayer needs to maintain the books using the same method consistently. In the event of his changing the method, he needs the consent of the secretary of the treasury department.

The term incurred accounting means that the tax payer has to record his income when the payment received has become due and he has to record the expenditure when the expenses have incurred. This type of accounting method is used generally by majority of the organizations. Although it makes the creation and maintenance of the financial reports a lot difficult still this method is used primarily by majority of the big as well as small organizations. In the incurred method of accounting the tax payer uses the ‘all-events test’ or the ‘earlier-of-test’ in order to determine the income generated. In the ‘all-events’ test it is mandatory for the taxpayer to include the income for the taxable year when all the events have occurred that have made the payment to be due. Also the amount of the income can be reasonably calculated. In the ‘earlier-of-test’ the income is included when the required performance has occurred, payment therefore is due, or the payment has been made. In case the payment has been made, the taxpayer can be considered to be as the cash basis tax payer.

In this system of accounting the taxpayer can claim deduction when all the events that have made the liability due have occurred. The incurred accounting is considered to be a lot more efficient system of accounting than the other system of cash accounting. It is supposed to give a comprehensive picture of the true financial state of the organization. Although due to the methods that it uses, it becomes a lot difficult to manage the accounts under the incurred accounting.