Transactions are only documented in a cash accounting system when money is exchanged or received. Accordingly, income is reported when money is received, and costs are reported when money is spent. This approach is easy to use and clear, making it perfect for small firms with few transactions. Cash basis versus income tax basis
Basis for income tax purposes differs from cash basis. Cash basis is the accounting method used for financial reporting while income tax basis is the accounting method utilized for tax purposes. Cash basis is based on actual cash transactions, whereas income tax basis is based on tax laws and regulations.
The timing of the transactions is the primary distinction between cash basis and tax basis. Tax basis tracks transactions as they happen, regardless of whether cash is collected or paid, while cash basis records transactions as they happen. This indicates that under tax basis, revenue may be recorded prior to receiving cash and expenses may be recorded prior to disbursing cash.
Yes, an audit of cash basis financial statements is possible. However, in order for the financial statements to accurately represent the accrual method of accounting, auditors will need to make changes. This means that any revenue that has been earned but not yet received and any expenses that have been incurred but not yet paid must be included by auditors.
Small firms might benefit from using both cash and accrual accounting since it gives them a better knowledge of their financial situation. Businesses may monitor their cash flow using cash accounting, whereas they can monitor their revenue and expenses using accrual accounting. Businesses can improve the accuracy of their financial picture and the quality of their financial decisions by combining the two ways. To choose the appropriate accounting approach for their company, however, firms need speak with their accountant.