You probably think of income tax going something like this: you get a check, and some of that check is withheld for taxes. Later, you file a little form that details when you got paid and what taxes got taken out. However, if you make money from more esoteric endeavors then working for a living, things get more complicated. As such, there are other ways to calculate the amount of taxes owed.
Enter the ratable accrual method. Instead of counting income as its paid, the income gets counted as it accrues. The process often comes up related to bond income.
The calculations for the ratable accrual method can get complicated, depending on the situation, but here's a simplified example:
A bond pays you $1,200 every quarter. You are set to collect your next $1,200 check on January 31. However, your tax year closes on December 31. If you're counting the income as it's paid, the full $1,200 would count in the next tax year. However, if you calculate the income as its accrued, then $800 was accrued before the end of the year, i.e. $1,200 divided by the three months in a quarter. January's $400 counts for next year, but the $800 for November and December count for this year.
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Finance: What is Accrued Interest?42 Views
Finance allah shmoop What is a crude interest A crude
interest would be an investment holding in oil Black crude
texas t remember jed boy Howdy coming Listen to a
story about a man named about that Alright all good
but that's not what a crude interest is at all
while street never sleeps right So even though a given
bond might pay forty bucks twice a year what happens
if you buy the bond midway through a semester period
Like let's say this particular bond has a coupon paying
eight percent a year So on a thousand dollars a
principle this bond pays eighty bucks a year in the
form of interest or forty bucks twice a year paid
on june thirtieth in december thirty first Well think about
the number's here on a monthly basis each month that
bond creeps closer to its next interest payment and over
the course of a year there are twelve creeps Different
creeps each month that goes by the bonds creep further
into the eighty dollars a year or eighty dollars per
twelve months or eight twelves of a bond payment each
month Well at eighty bucks a year despond pay six
Dollars and sixty seven cents a month in interest Yeah
we got the math there Yeah So let's say you
sell it halfway into its period Presumably the market price
would reflect the accrued interest on the bond or three
months worth of interest or three times that six sixty
seven figure or yes twenty bucks And that makes sense
right You've held that bond a quarter a quarter of
a year a quarter of a year's interest of eighty
boxes one fourth of eighty or yep twenty So yeah
the math works What do you know So the price
of the bond would creep upward to reflect that accrued
interest That is if you sold it on the exact
end of the quarter that thousand dollar bond which was
conveniently selling it exactly part The end of the last
payment Well that bond would likely sell in the market
place for about a thousand twenty dollars The buyer would
get a check for forty bucks just ninety days later
from the a company that issued the bond And well
they can take that forty dollars and reinvested in crude
oil How about that Now you've made old jed very
proud So come and listen to a story about a
man named shmoop Poor rests A writer barely kept his
family fed and one day there was a site of 00:02:18.46 --> [endTime] web and well stuff happens
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