Cash vs. Accrual accounting methods - comparison

Cash vs . Accrual Accounting Methods

Choosing the proper accounting method to be used is very important if one is considering the effects of tax in his or her business . If not properly chosen , an accounting method can be a headache to business owners , for it will cost them money and time just to fix the errors made in the computation of taxes

There are two methods of accounting that is approved by the Internal Revenue Service (IRS . The first method is the cash basis accounting Basically , cash basis accounting is an accounting

method that accounts or records transactions whenever cash is received from customers . On the other hand , accrual basis accounting is an accounting method that accounts or records transactions when revenue is incurred . This does not mean that cash should be received whenever revenue is incurred (Collins 2001

Each accounting method stated above can have advantages and disadvantages over the other whenever tax comes into the picture . Making sure one chooses the right accounting method for his or her business is a crucial part when tax is involved . If one does not choose the right method for his or her business , then he or she will suffer consequences such as paying too much tax or thinking one 's business is not profiting anymore . One advantage of cash basis accounting is that it is only accounting for all the cash that is received and disbursed . Therefore tax computations are simpler and more accurate . However , if one chooses to employ cash...