Comparison of Cash and Accrual Methods of Accounting - Cash Basis

Cash Basis

The cash method of accounting records revenue when cash is received, and records expenses when cash is paid. For a business invoicing for an item sold, or work done, the corresponding amount will not appear in the books until payment is received - and similarly, debts owed by the business will not appear until they have been paid.

In the United States tax environment, cash basis tax payers include income when it is received, and claim deductions when expenses are paid. A cash basis taxpayer can look to the doctrine of constructive receipt and the doctrine of cash equivalence to help determine when income is received. Most individuals start as cash basis taxpayers. There are four types of taxpayers that cannot use the cash basis if their gross receipts are too high, and they do not meet other exceptions: (1) C corporations; (2) partnerships with at least one C corporation partner; (3) tax shelters; and (4) taxpayers required to keep inventory (retail, wholesale, manufacturer etc...) Exceptions (1) Farming Businesses (2) Qualified PSC's (3) Entities with average gross receipts over three years of not more than $5,000,000