Question

The cash basis method of accounting for tax purposes. How does it work? Who can use the cash basis method? Any special rules for inventory? How are prepaid expenses treated? What is constructive receipt? How is “cash” defined?

Answer 1

The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. This method does not recognize accounts receivable or accounts payable.The cash method is also beneficial in terms of tracking how much cash the business actually has at any given time; you can look at your bank balance and understand the exact resources at your disposal.Until the cash is not received or paid the income cannot be taxed.

as per the cash basis of accounting inventory is valued as inventory is not recorded in the books unless it is paid for to the vendor it is listed as an asset on the balance sheet. Once the inventory is sold to a customer, it is moved to the cost-of-goods-sold account.cost of goods sold be recognized when it is paid for by the business or the inventory is sold to customers, which ever is later. This allows year-end sales to be recognized in one year and the cost of goods sold in another, alleviating tax liability issues at year end.

Prepaid expenses means expenses paid before they are incurred.in case of prepaid expenses accountant would debit the expense and credit and credit the cash in the period when the bill is paid and not when the bill is received.

Constructive receipt means a person is liable to pay tax on the income despite the fact that the money has not been actually received.Constructive receipt refers to situations where income can be used despite the fact that this money has not yet been physically received.

cash means currency, coins other legal tenders which can be exchanged against goods, debts or services.Cash is recorded as a current asset on the balance sheet. Even though cash can be saved for future periods, it is still considered a current asset because it can because it can be used in one period.