cash accounts
cash accounts
Using the Cash Method for Tax Accounting
When submitting tax figures to the IRS, there are 2 types of accounting methods to use. The 2 accepted methods are the accrual and cash methods. The business is responsible for choosing which method the company will use.
Many issues can be factored into the decision or the selection can be as easy as a personal desire. Bigger companies usually take more procedures into account like volume of sales, how much inventory is stored, number of sales, the past experiences of an accountant, and the list keeps going.
The cash method of tax accounting records all transactions and income at the time of payment. Even if the sale was made the previous year, according to the tax accounting books, the income is recorded when the payment is physically received.
For small businesses that may not pay a secretary or have an accounting staff, the cash method of recording tax accounting is fitting. With this method, accounts and sales are left open until the full payment is received. Using the cash method helps small businesses be aware of what accounts have been completed and closed and which sales have not been collected on yet.
The procedures of small businesses can range anywhere on the spectrum. Some are very rigid and have all paperwork filed within minutes of the transaction and some don’t have access to files or a computer for a day or two. When agreements or sales are completed on the road, outside the company walls, it takes discipline to get every sale receipt back to the file cabinet.
If partial payments are made over a long period of time, cash accounting will work well to show consistent income. When using cash accounting, these transactions reflect the cash flow accurately. Since cash accounting records each installment, the actual money received would be consistent and relatively even. Payment plans can last for several years if the product or service is very expensive. When longer plans are used for larger sales, this method will show more consistency.
When income from sales is needed to pay for operating expenses, cash accounting will accurately show the amount of money that was earned and can be used to pay those bills.
Once the tax accounting method on a cash basis is selected, it is next to impossible to efficiently change the method. If a change to the accrual method is desired, the cash method must have been used for the last two consecutive years. At that time, a formal request must be submitted to the Secretary of the Treasury. To make sure this process is done correctly and all the bases are covered, the owner/officer of the business should consult with a certified public accountant.
About the Author
Joe Coffee is a consultant for the online marketing firm, Web Shepherd. Visit www.AccountingAndYou.com for tips about leading methods of accounting and small business accounting options.
Why is the measurement of Allowance for Doubtful Accounts not required under the Cash Basis of Accounting?
Its required under the Accrual basis, so why not cash basis?
The cash basis of accounting is only concerned about when cash is paid or when cash is received. When converting a set of books from accrual basis to cash basis, accounts receivable and accounts payable are removed. It doesn’t matter how much management thinks will be uncollectible in the future (AKA Allowance for Doubtful Accounts) because accounts receivable itself is ignored for cash basis. At the end of the year, whatever is reported as Accounts Receivable is removed and that amount is also removed from income.
Cash and Receivables- 3 Accounts Receivable