| Unlike Generally Accepted Accounting | | | | The cash method, or cash basis, of tax |
| Principles(GAAP), tax accounting is an extensive | | | | accounting is simply recording transactions as the |
| set of laws and regulations required of businesses | | | | money is exchanged. This method is more |
| to submit income tax information. Just like federal | | | | accurate and gives a better feel for how much |
| income tax, this set of comprehensive accounting | | | | spendable capital a business has to use. Depending |
| principles is regulated at the national level. | | | | on the set-up of the business procedure, the cash |
| As of the 2008 fiscal year, there are only a few | | | | method takes a little more discipline in book |
| different ways to compile tax accounting | | | | keeping. Unlike the accrual method that records |
| information, but 2 main methods. The acceptable | | | | the transaction as the order is processed in the |
| ways of submitting information are the cash | | | | office, in cash accounting the payment must be |
| method, accrual method, or a combination of | | | | recorded directly after payment is taken. The |
| both. | | | | cash method can also leave a window for fraud |
| Depending on qualification, these different | | | | or theft, whereas accrual accounting has checks |
| methods can be chosen by a company according | | | | and balances to make sure the correct amount of |
| to timing of transactions such as credits and | | | | payment is applied for each order. |
| debits. If qualified for either method, the company | | | | So, after determining if your business is required |
| will look at the advantages and disadvantages of | | | | to use the accrual method or not, it has a choice. |
| each method and choose the most beneficial | | | | The choice depends on the structure of the |
| method. The American Institute of Certified Public | | | | business and the preferences of advantages and |
| Accountants(AICPA) submitted a request to | | | | disadvantages of each method. |
| change the accounting method, but nothing has | | | | It is important to note that a business is not |
| been overturned as of yet. | | | | allowed to change tax accounting methods back |
| There are two parameters that a business must | | | | and forth. If a change is desired, the current |
| not qualify for to have the ability to choose their | | | | method must have been used for the last two |
| tax accounting method. A business must use the | | | | consecutive years. At that time, a formal request |
| accrual method if the sales are over $5 million or | | | | must be submitted to the Secretary of the |
| there is inventory stockpiled that will either be | | | | Treasury. To make sure this process is done |
| sold to the public or used to make products sold | | | | correctly and all the bases are covered, the |
| to the public. | | | | owner/officer of the business should consult with |
| The accrual method, or accrual basis, of tax | | | | a certified public accountant. The Secretary of the |
| accounting records sales and purchases as the | | | | Treasury also has the right to require a business |
| order is processed. In this method, physically | | | | to re-compute the taxable income to more |
| receiving or paying money is not the time of | | | | accurately show a business's tax accounting. |
| recording. When a sale is made or a job is | | | | In summary, tax accounting requires careful |
| completed the credits or debits are recorded, | | | | analysis and application of the tax code, regulation |
| regardless of the money actually changing hands | | | | provisions, administrative pronouncements, and |
| or not. This method is simpler when large | | | | case law. It is possible and sometimes more |
| contracts are signed, but the payment plan may | | | | advantageous to complete this process in-house |
| last several years. One disadvantage would be | | | | or with the aid of online accounting, but it is |
| that even though the books show a large capital, | | | | recommended for some businesses to seek |
| the actual funds are not in the account. | | | | professional guidance. |