A method of accounting that reflects expenses incurred and income earned for INCOME TAX purposes for any one year.
Taxpayers who use the accrual method must include in their taxable income any money that they have the right to receive as payment for services, once it has been earned. Any expenses that they may take as deductions when computing taxable income must be due at the time the deduction is taken. For example, suppose a surgeon performed a tonsillectomy in October 2003, and on December 31, 2003, he received a bill for carpeting installed in the waiting room of his office. He was paid the surgical fee on January 3, 2004, the same day he paid for the carpeting. The surgical fee will be included in his taxable income for 2003, the year in which he earned it, regardless of the fact that he was not paid until the following year.
His expenses for the carpeting can be deducted from his 2003 income because once he received the bill, he was bound to pay it. The fact that he did not pay for the carpeting until the following year does not prevent him from taking the deduction in 2003.