Question

What is the impact of cash bases and accrual-based accounting in business expense deductions.

What is the impact of cash bases and accrual-based accounting in business expense deductions.

Homework Answers

Answer #1

Cash Based Accounting: Cash based Accounting recognises all expenses and income when actual cash is paid for any expense or when income is received in cash. It does not recognise the concept of accruals ie. income earned but not received or expenditure earned but not paid has no relevance in cash based accounting.

Accrual based accounting on the other hand works on the matching principle i.e. expenses are recorded in the period in which they are incurred and revenues are recognised in the period in which they are generated irrespective of payments.

Hence, Business expenses are deducted when actual cash is paid in Cash based accounting while they are deducted when the expenditure is incurred ireespective of actual payment date.

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