Cash Basis Accounting

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Generally accepted accounting principles prescribe the accrual basis of accounting over the cash basis of accounting. The accrual basis of accounting measures the performance of a business by showing in detail every transaction regardless of when the funds are received. Cash basis of accounting only accredits earnings and expenses when money is really being paid out or received. The cash basis of accounting is a less expensive way of keeping records but the failure of using this method is that financing is very difficult because of inaccuracy. The big difference between accrual and cash basis of accounting is when one uses cash basis entries are recorded at the time payment is received. On the other hand the accrual basis of accounting the entry would be recorded when the order is placed. For example I own a restaurant and a catering order is placed in May for seven pans of food and the event is July 4th 2013. If I am using the accrual method I would record the entry in may but if I am using the cash method the entry would be recorded in July when payment is received. As a business owner I would use accrual method only because it recognizes Receivables and payable. When using the cash basis a company can appear that it is earning profit when in fact it is loosing funds. Cash basis does not acknowledge money that is owed which make is very difficult to keep accurate records. The IRS generally requires companies to use the cash accrual basis of accounting on their tax return. The Internal revenue service does allow the cash method of accounting if certain criteria are met because tax laws change frequently it is essential to contact a CPA if a business owner decides to use cash basis of accounting. In conclusion both methods of accounting are great to use for a business it just depends on how you as a business owner would like to keep

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