Accrual Method Of Accounting Case Study

Analyze the cash method described in the case

As a paving company Jim Turin & Sons, Inc. purchases asphalt from its supplier. Jim has worked it out with the manufacturing company to deliver the material hours before the job since the properties of the asphalt may render it useless if delivered too soon. “Once a job is completed, [Jim Turin & Sons, Inc.] is generally paid within 10 to 30 days of billing” (Justia, 2000).
Jim Turin & Sons, Inc. used the cash method of accounting which means it took the deduction for the cost of the asphalt for a job once it paid the supplier and recognized the income when it received the payment for the job. According to the IRS Publication 334 “Under the cash method, include in your gross income all items

Doing so would cause the asphalt to harden and therefore make it unusable. “Because asphalt cannot be stored, it is not susceptible to being inventoried” (Justia, 2000).
Analyze the accrual methods described in the case The Commissioner of Internal Revenue (Commissioner) argued that Jim Turin & Sons, Inc. should have used the accrual method of accounting. By using the accrual method of accounting “you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.” (IRS, 2017). In order for Jim Turin & Sons, Inc to have used this method of accounting it would have had to match the cost of the merchandise with the revenue earned from the sale. Using the matching of revenue and cost the company would have had to have kept an actual inventory and maintained records of the costs associated with said inventory. Since the costs are not immediately deducted under the accrual method they are deferred to the year when the merchandise is