Business Tax Accounting

2 Types of Tax Accounting

Executive Summary About 2 Types of Tax Accounting By Joe Cooffe

Unlike Generally Accepted Accounting Principles(GAAP), tax accounting is an extensive set of laws and regulations required of businesses to submit income tax information. The acceptable ways of submitting information are the cash method, accrual method, or a combination of both. If qualified for either method, the company will look at the advantages and disadvantages of each method and choose the most beneficial method. The American Institute of Certified Public Accountants(AICPA) submitted a request to change the accounting method, but nothing has been overturned as of yet.

There are two parameters that a business must not qualify for to have the ability to choose their tax accounting method.

The accrual method, or accrual basis, of tax accounting records sales and purchases as the order is processed. In this method, physically receiving or paying money is not the time of recording.

The cash method, or cash basis, of tax accounting is simply recording transactions as the money is exchanged. Depending on the set-up of the business procedure, the cash method takes a little more discipline in book keeping. Unlike the accrual method that records the transaction as the order is processed in the office, in cash accounting the payment must be recorded directly after payment is taken. The choice depends on the structure of the business and the preferences of advantages and disadvantages of each method.

It is important to note that a business is not allowed to change tax accounting methods back and forth. The Secretary of the Treasury also has the right to require a business to re-compute the taxable income to more accurately show a business’s tax accounting.

In summary, tax accounting requires careful analysis and application of the tax code, regulation provisions, administrative pronouncements, and case law.

Cash Accounting or Accrual Accounting

Executive Summary About Cash Accounting or Accrual Accounting By Terry Cartwright

The tax authority require bookkeeping records to calculate the tax due. The choice for small business is basically cash accounting or accrual accounting each of which has advantages and disadvantages.

The date of the sales invoice and the date of purchase invoice are known as the tax point. The tax point does not determine the spread of that transaction over the tax period which can be different when accounts are prepared on an accruals basis as opposed to a cash basis.

For the purposes of cash accounting the effective inclusion of the transaction in the financial records is the date the cash or bank

The date the amount was paid out or received into cash funds or bank account is the date to be used fopr inclusion in the accounts.

That entails matching the financial documents to the payments and receipts records, a feature many small businesses might find onerous as record keeping ios often regarded by samll business as an administrative burden.

Virtually all professional accountants adopt an accruals basis for clients accounting purposes as it is based upon recording all financial information whether relevant to the tax period or not and then adjusting the management accounting profit indicated to produce the net taxable profit or loss.

By operating an accruals basis all financial documents are recorded according to the tax point date. If every transaction was paid or received within the year then the cash accounting and accruals basis would produce the same tax accounts.

The main adjustment a small business or the accountant might make to accounts prepared on the accruals basis is to first prepare the set of accounts according to the tax point of the primary accounting records and then examine those transactions and adjust them according to their relevance to the financial period for which the accounts are being prepared.

Let us assume a quarterly rent invoice was received dated 1 December for the 3 months from December 1 to February 28 which was paid by the small business owner by cheque on December 31 and a year end date also of December 31

On a cash basis the rent would not technically be included in the accounts as it would be shown as a rent payment from the business bank account on January 2 or later if cashed by the recipient at a later date. Assuming the rent was paid in cash prior to the 31 December then the whole 3 months rent would be included in the current financial year. On an accruals basis the rent invoice would have been entered in the accounting records with an effective date of December 1. The accountant or small business owner preparing the accounts would deduct 2 months from the qaurterly amount leaving one months rent in the current year accounts with the other 2 months being included the following year.

Mvoing the prepayment not specific to the accounting period is how business treats a prepayment under accrual accounting.

When operating cash accounting only transactions actually paid for or received are valid. Cash accounting might appear easier but has the disadvantage of maintaining receipts and payments records in addition to the primary documents which should also be matched to the financial transactions to support the accounts.

Accrual accounting is based upon recording all financial transactions and then adjusting the end result to determine the most accurate net taxable profit.

The accruals basis is favoured by accountants as it reaches an accurate tax liability as opposed to more or less tax being payable on the cash basis according to the credit control policies and practises of the business its suppliers and clients.

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