Cash Accounting Method
In business, one may come across the cash accounting method, also known as cash-basis accounting, during the accounting period. The cash method of accounting is used where payments are recorded as revenues when cash is received, and expenses are recorded when cash is spent. This means that revenues can be registered in the financial statement during one accounting period, while expenses can be registered in the financial statement during another accounting period, regardless of the matching principle under generally accepted accounting principles (GAAP). This situation limits the use of the cash accounting method to small businesses.
What is the Cash Accounting Method used for?
As one of the two basic methods of accounting, the cash accounting method is the simplest and less expensive of the two, perfect for the use of small businesses. The reason for that is the fact that it provides an accurate image of the business’ financial situation at that exact moment. It shows a company how much money they have on hand at that moment.
More prominent companies and corporations, however, are not allowed to use other accounting methods than the accrual method of accounting as it respects the generally accepted accounting principles. Small businesses are allowed to choose the type of accounting method they want to use. While the accrual method is more complex and expensive, the cash method can generate delays in the company’s books as it doesn’t give a broader picture of its financial situation.
Furthermore, the IRS prohibits using the cash accounting method for companies with an annual gross income of over $25 million, and the Tax Reform Act of 1986 forbids companies that have shareholders and partnerships from using it as well. It should be noted that the accounting method used for tax purposes must be the same as the one used for internal booking.
Popular Real Estate Terms
Assemblage in real estate is the process of combining multiple small plots of land into one larger plot. This is accompanied by plottage, which is the increase in value that occurs when ...
An upper limit on the interest rate that can be charged in a variable rate mortgage over its life. For example, a variable rate loan is initially offered at 7% loan rate, and its interest ...
Looking for an amortization definition? Amortization is an accounting term that basically means something like “reducing the gap between what is owed”. Here’s the play by ...
An individual, educated, trained, and licensed in the principles of designing structures, and rendering drawings, specifications, bidding requirements. ...
Those factors causing the movement of people, industry, and business from the central city to the outside central city areas, suburbs, and/or small cities. Elements of the dispersing force ...
Another residence in addition to the main residence where a person or family resides. An example is a second home out of the city used on weekends and during vacations. Interest and real ...
Lien which is over and above a first lien. A second lien is subordinate to the first lien and can be satisfied only after the initial lien is satisfied. ...
Projecting structure or part of a building. For example, a home was built with balconies jutting out from the sides of the building or a large rock formation constructed out into the ocean ...
An obligation of the owner of property that is recorded with his permission such as a mortgage. Encumbrance on property without being objected to by the owner. ...
Have a question or comment?
We're here to help.