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.
Related or Semi-related Video
Finance: What is Accrued Revenue?2 Views
Finance Allah Shmoop What is a crude revenue Okay so
shouldn't it be money you make from selling like a
fart joke material or a fake dog vomit Or you
know those photographs you found at the bottom of your
dad's you know sock drawer Yeah Different kind of crude
act Crude revenue is just revenue that you've earned like
you know sold stuff or done stuff or whatever It's
tough to earn that money You just haven't collected it
yet You've accrued it Like if you're a shmoop writer
Well that's what these people look like Yeah It's likely
we have contracted with you to produce some hundred seventy
four page document for which we agree to pay you
twelve dollars You know when you deliver it you slave
away writing that doc deliver it Tio Evil taskmaster Todd
this guy right here and then after he places the
two quarters on the dead cat's eyes Well then you
get paid Two weeks later you will have a crude
that revenue to your own writing contracting company You just
won't have been paid until Taskmaster Todd has given you
the nod So yeah that's crude revenue You'd better get
used to the whips there especially if you plan to
keep a rooting for your parents dresser drawers and you 00:01:15.77 --> [endTime] really don't want to do that people
Up Next
What is Accrued Interest? Most bonds pay interest on a fixed calendar schedule, which can be quarterly, bi-annually, or annually. The interest earn...
What is Accrual Accounting? Accrual accounting is used to determine how well a company is doing by looking at the present and the future. It takes...