Cash and Accrual

Essay by McJr75University, Bachelor'sA, March 2007

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IntroductionThere are always so many different decisions to make when it comes to opening up a business whether it is small or large. One of the decisions to make is what type of accounting method to use. Most small business, as long as they do not make over $5 million a year, has a choice whether to go with cash or accrual. Hence if you business makes or exceeds the $5 million per year then the IRS requires them to use the accrual method. There is a basic understanding of how each one works individually and what each one brings to the table in terms of business. We can acknowledge the fact that the cash basis although very simple to understand, does not stack up as the most commonly used basis. In the following paragraphs those topics will be discussed in further and examples will be provided to further grasp the understanding of said topics.

Cash BasisCash base methods is a very simple method to use, and some would even refer to this method as a lifeline to every business. The cash method only recognizes income or expenses only when they take place. Income is only counted when it has actually been received from the customer or customers. The cash method usually has a strong hold on the expenses within the business. The cash basis can accelerate or defer payment for certain items. These items can be categorized as supplies, repair, advertising, interest, and taxes.

Like many of the pros to cash basis there can be just as many limitation or problems. Cash basis serves as a good purpose to be very simple to use but it does supply its limitations in the fact that it can leave out very important transactions that can affect the correct comprehension or...