- Cash accounting method or cash foundation
- Cost method of accounting
- Accrual accounting technique or accrual basis
These two methods are very useful in monitoring the cash generated and expenses incurred by the organization. Accounting done with these methods by after the generally accepted accounting principles and conventions of accounting is a good idea for company management and institutions and people interested within the company's financial matters like creditors and shareholders.
Cash Sales Method Details
In the cash method of accounting, income isn't counted unless the company receives cash/check payment for the products sold. Similarly, there is also a rule for counting the expenses produced by the firm. Expenses are not counted unless the quantity of expense is actually paid by the company. So, within simple words, we can say that this is an authentic approach towards accounting. Accounting done with the help of cash accounting method gives exact information about the cash balance of the company. The problem of display of exaggerated earnings and profits won't occur in the books of companies which are maintained while using cash accounting method.
On the other hand, a company following cash accounting won't show expenses on taxes unless they are paid. Therefore, in some quarters, when the expenses are not compensated, the profits of the company may be higher compared to expectations of most analysts. But, in the quarter once the company actually pays the tax, net profits will end up being squeezed. Financially weak firms may even report quarterly losses as against profits within the preceding quarters. So, shareholders tracking the performance of these businesses should consider these facts before they calculate or estimate profits from the company and decide on making investment in their shares.
The cash method for tax purposes is the most simplest to comprehend. It is just according to the normal human inclination of reporting money earned only after receiving it. Such kind of accounting is fantastic for small businesses, enterprises and start-up firms. One of the major benefits of cash method is its simplicity for use and getting realistic financial information on the company. Another advantage is that at times, the enterprise owner might possibly not have to shell out more in taxes as he doesn't declare income until he receives the payment from another party. So, if he gets the payment in the following financial year, he saves money in taxes in the present year.
Cash Accounting Example
Assume that a firm offers stock worth $10, 000 to a client in the present financial year. Due to some reason, the client is not able to pay the firm immediately and can pay only within the next financial year. Now, if this firm uses cash sales method, then it will not report profits unless they're actually credited in its bank. So, the profit gained on income of $10, 000 sale of stock won't be contained in the total net income of the firm for the present financial year. The benefit of this is that the firm can get some relief in tax payment at least till this files taxes for next year, where it will have to pay out taxes for this particular sale.
Comparison With Accrual Sales Method
Cash method of accounting is often compared using the accrual accounting method. Accrual accounting method is considered to be better than cash accounting provided you've got a very large business enterprise with a large turnover and therefore are dealing in inventories. Inventory record becomes simpler with the actual accrual method. In the accrual method, income is registered following the sale of goods; even before the company receives the payment or exactly the same. Also, expenses are deducted in the same fiscal period regardless of whether the firm has actually paid them or not.
Lastly, we conclude that if you are an owner of the small firm, then you should go with cash approach to accounting. Accounting practices have undergone a vast change using the changing business environment and hence as the head of the business, you should keep yourself acquainted with them. Hiring qualified and talented auditors/accountants will help avoid any errors in company accounts.
Cash Sales Method Details
In the cash method of accounting, income isn't counted unless the company receives cash/check payment for the products sold. Similarly, there is also a rule for counting the expenses produced by the firm. Expenses are not counted unless the quantity of expense is actually paid by the company. So, within simple words, we can say that this is an authentic approach towards accounting. Accounting done with the help of cash accounting method gives exact information about the cash balance of the company. The problem of display of exaggerated earnings and profits won't occur in the books of companies which are maintained while using cash accounting method.
On the other hand, a company following cash accounting won't show expenses on taxes unless they are paid. Therefore, in some quarters, when the expenses are not compensated, the profits of the company may be higher compared to expectations of most analysts. But, in the quarter once the company actually pays the tax, net profits will end up being squeezed. Financially weak firms may even report quarterly losses as against profits within the preceding quarters. So, shareholders tracking the performance of these businesses should consider these facts before they calculate or estimate profits from the company and decide on making investment in their shares.
The cash method for tax purposes is the most simplest to comprehend. It is just according to the normal human inclination of reporting money earned only after receiving it. Such kind of accounting is fantastic for small businesses, enterprises and start-up firms. One of the major benefits of cash method is its simplicity for use and getting realistic financial information on the company. Another advantage is that at times, the enterprise owner might possibly not have to shell out more in taxes as he doesn't declare income until he receives the payment from another party. So, if he gets the payment in the following financial year, he saves money in taxes in the present year.
Cash Accounting Example
Assume that a firm offers stock worth $10, 000 to a client in the present financial year. Due to some reason, the client is not able to pay the firm immediately and can pay only within the next financial year. Now, if this firm uses cash sales method, then it will not report profits unless they're actually credited in its bank. So, the profit gained on income of $10, 000 sale of stock won't be contained in the total net income of the firm for the present financial year. The benefit of this is that the firm can get some relief in tax payment at least till this files taxes for next year, where it will have to pay out taxes for this particular sale.
Comparison With Accrual Sales Method
Cash method of accounting is often compared using the accrual accounting method. Accrual accounting method is considered to be better than cash accounting provided you've got a very large business enterprise with a large turnover and therefore are dealing in inventories. Inventory record becomes simpler with the actual accrual method. In the accrual method, income is registered following the sale of goods; even before the company receives the payment or exactly the same. Also, expenses are deducted in the same fiscal period regardless of whether the firm has actually paid them or not.
Lastly, we conclude that if you are an owner of the small firm, then you should go with cash approach to accounting. Accounting practices have undergone a vast change using the changing business environment and hence as the head of the business, you should keep yourself acquainted with them. Hiring qualified and talented auditors/accountants will help avoid any errors in company accounts.