Types of Tax Accounting

A business must decide between 2 main accounting methods for their tax accounting. These accounting methods are enforced by law and are reviewed to comply with tax accounting guidelines.

As of the 2008 fiscal year, there are only a few different ways to compile tax accounting information, but 2 main methods and their uses are:

• The accrual method, or accrual basis, of tax accounting records sales and purchases as the order is processed. In this method, physically receiving or paying money is not the time of recording. When a sale is made or a job is completed the credits or debits are recorded, regardless of the money actually changing hands or not.


• The cash method, or cash basis, of tax accounting is simply recording transactions as the money is exchanged. This method is more accurate and gives a better feel for how much spendable capital a business has to use. Depending on the set-up of the business procedure, the cash method takes a little more discipline in book keeping.


• Unlike the accrual method that records the transaction as the order is processed in the office, in cash accounting the payment must be recorded directly after payment is taken. The cash method can also leave a window for fraud or theft, whereas accrual accounting has checks and balances to make sure the correct amount of payment is applied for each order.


• So, after determining if your business is required to use the accrual method or not, it has a choice. The choice depends on the structure of the business and the preferences of advantages and disadvantages of each method.

In summary, tax accounting requires careful analysis and application of the tax code, regulation provisions, administrative pronouncements, and case law.