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Cash Method of Accounting

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Cash Method of Accounting

Cash Method of AccountingCash Method of AccountingCash Method of AccountingCash Method of AccountingCash Method of Accounting

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Marto Fe
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Cash method of accounting

1.3 Advantages for tax planning and IRS


stand

The cash method of accounting, also known as cashbasis accounting, cash receipts and disbursements
method of accounting or cash accounting (the EU
VAT directive vocabulary Article 226) records revenue
when cash is received, and expenses when they are paid in
cash.[1] As a basis of accounting, this is in contrast to the
alternative accrual method which records income items
when they are earned and records deductions when expenses are incurred regardless of the ow of cash.[2]

1.1

There are certain advantages in tax planning when the


cash method of accounting is used: for instance, payment
of business expenses may be accelerated before year end,
in order to maximize tax deductions, whereas billings for
services may be postponed to after year end, so that payments won't be received until the new year, thus postponing tax payments on such income.[4] Because of these advantages and the manipulations that can occur with it in
order to minimize taxable income, the IRS has discouraged (although not prohibited entirely) the cash basis of
accounting for tax purposes. For instance the companies
that use the cash basis of accounting may not report any
inventory in their nancial statements, in fact reporting
of any inventory at year end can lead to manipulation of
taxable income to an enormous extent.[6]

Cash method of accounting in the


United States (GAAP)
Use in contract accounting

The cash method of accounting has historically been one


of the four methods of recognizing revenues and prots
on contracts, the other ones being the accrual method,
the completed-contract method and the percentage-ofcompletion methods. Since the approval by Congress of
the Tax Reform Act of 1986, the cash method could no
longer be used for C corporations, partnerships in which
one or more partners are C Corporations, tax shelters, and
certain types of trusts.[3]

2 Cash method of accounting according to IFRS


3 References
[1] Douglas J. McQuaig; Patricia A. Bille; Tracie L. Nobles;
Judy McQuaig Courshon (3 March 2010). College Accounting, Chapters 1-12. Cengage Learning. pp. 185.
ISBN 978-1-4390-3878-9. Retrieved 4 March 2012.

Because of 1986 regulation, in general, construction businesses do not use the cash method of accounting. Some
construction businesses use the cash method; and there
are many other companies that use a modied form of the
cash method, which is acceptable under federal incometax regulations. Under the modied cash method of accounting, most income and expenses are determined under cash receipts and disbursements, but purchase of
equipment and of items whose benet will cover more
than one year is to be capitalized, whereas such items as
depreciation and amortization are charged to cost.[3]

1.2

[2] Treas. Reg., 26 C.F.R. 1.446-1(c)(1)(ii)


[3] William J. Palmer; William Palmer; William E. Coombs;
Mark A. Smith (15 September 1999). Construction Accounting & Financial Management. McGraw-Hill Professional. pp. 2526. ISBN 978-0-07-135963-4. Retrieved
4 March 2012.
[4] Gerald E. Whittenburg; Martha Altus-Buller (7 December 2009). Income Tax Fundamentals 2010. Cengage
Learning. p. 7. ISBN 978-1-4390-4411-7. Retrieved
4 March 2012.

Use in other types of businesses

[5] Linda M. Johnson; Cch Tax Law Editors (April 2008).


Federal Tax Course (2009). CCH. p. 97. ISBN 978-08080-1862-9. Retrieved 4 March 2012.

The cash method of accounting is also used by other


types of businesses, such as farming businesses, qualied
personal business corporations and entities with average
gross receipts of $5,000,000 or less[4] for the last three
scal years.[5]

[6] Steven M. Bragg (12 February 2010). The Ultimate Accountants Reference: Including GAAP, IRS and SEC Regulations, Leases, and More. John Wiley & Sons. p. 666.
ISBN 978-0-470-59395-0. Retrieved 4 March 2012.

4 SEE ALSO

See also
Basis of accounting

Text and image sources, contributors, and licenses

5.1

Text

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5.3

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