Wednesday, October 12, 2011

Differences between cash method and accrual method

Taxpayers have two primary choices that they must stick to when completing accounting records for tax returns. What are the main differences between the cash method of accounting and the accrual method of accounting for tax purposes?

The Cash Method

The cash method of accounting has a focus on money our and money in. For example, a taxpayer has income when she receives a payment from a buyer. The taxpayer has a deduction when they make payment.

The Accrual Method

Oppositely, the accrual method of accounting focuses more on legal rights and obligations: An item is considered income when the right to receive it is earned. An item is deductible when the taxpayer becomes liable to pay the item.

It is important to note that individual taxpayers are generally required to use the cash method of accounting. Certain taxpayers must use the same method of accounting for tax purposes as they use to keep their books.

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