Recognizing Income for Teal Company

What is the proper way for Teal Company to recognize income for tax purposes? Teal company, being an accrual basis taxpayer, must recognize the income in 2016, which is when they delivered the goods and effectively earned the income according to tax accounting rules.

The Accrual Method of Accounting

The accrual method of accounting is a system in which revenue is recognized when it is earned and expenses are recognized when they are incurred, regardless of when cash is actually exchanged. This method provides a more accurate representation of a company's financial position than the cash basis method.

Recognition of Income for Tax Purposes

For Teal Company, as an accrual basis taxpayer, it is crucial to understand when income should be recognized for tax purposes. According to tax accounting rules, income should be recognized when all events have occurred that fix the right to receive the income and the amount can be reasonably determined.

Given that the item was delivered on January 4, 2016, the income related to the sale in question should be recognized in 2016, the year in which the goods were delivered and income was actually earned for tax purposes. It is important to note that the fact Teal included the sale in its 2015 income for financial accounting purposes does not determine tax treatment.

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