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ACCOUNTING METHOD

accounting method.A system for determining income and expenses for tax purposes.

accrual  accounting  method  (<<schwa>>-kroo-<<schwa>>l).  An  accounting  method  that

records  entries  of  debits  and  credits  when  the  liability  arises,  rather  than  when  the  income  or

expense is received or disbursed. — Also termed accrual basis. Cf. cash-basis accounting method.

[Cases:  Internal  Revenue    3099;  Taxation    1078.  C.J.S.  Internal  Revenue  §§  25,  46,  57,  371;

Taxation § 1759.]

capitalization  accounting  method.A  method  of  determining  an  asset’s  present  value  by

discounting its stream of expected future benefits at an appropriate rate.

cash-basis  accounting  method.An  accounting  method  that  considers  only  cash  actually

received  as  income  and  cash  actually  paid  out  as  an  expense.  Cf.  accrual  accounting  method.

[Cases: Internal Revenue    3100; Taxation    1078. C.J.S. Internal Revenue §§ 25, 44, 56; Taxation

§ 1759.]

completed-contract  accounting  method.A  method  of  reporting  profit  or  loss  on  certain

long-term contracts by recognizing gross income and expenses in the tax year that the contract is

completed.  [Cases:  Internal  Revenue    3101;  Taxation    1078.  C.J.S.  Internal  Revenue  §§  21,

24–26; Taxation § 1759.]

cost accounting method.The practice of recording the value of assets in terms of their cost. —

Also termed cost accounting.

direct charge-off  accounting  method.A  system  of  accounting  by  which  a  deduction  for  bad

debts is allowed when an account has become partially or completely worthless.

equity  accounting  method.A  method  of  accounting  for  long-term  investment  in  common

stock based on acqui-sition cost, investor income, net losses, and dividends.

fair-value accounting method.The valuation of assets at present actual or market value.

installment accounting method.A method by which a taxpayer can spread the recognition of

gains from a sale of  property  over the  payment  period by computing the  gross-profit percentage

from the sale and applying it to each payment. [Cases: Internal Revenue    3104; Taxation    1078.

C.J.S. Internal Revenue §§ 47–50; Taxation § 1759.]

percentage-of-completion  method.An  accounting  method  in  which  revenue  is  recognized

gradually during the completion of the subject matter of the contract.

physical-inventory accounting method.A method of counting a company’s goods at the close

of an accounting period.

purchase  accounting  method.A  method  of  accounting  for  mergers  whereby  the  total  value

paid or exchanged for the acquired firm’s assets is recorded on the acquiring firm’s books, and any

difference between the fair market value of the assets acquired and the purchase price is recorded

as goodwill. [Blacks Law 8th]