Question

4) Explain how the Cash method of accounting provides some level of control over timing of income and expense recognition. State at least one principal that the IRS might use to change the income timing.

Answer 1

Cash Method of Accounting means booking of an item of expenses & income as when it incurred. For Example dividend income when it actualy received it is booked in to account of the receiver though the provision of dividend can be made by the payer if it maintain its books on accrual basis. In case of expenses salary & wages expenses booked for the month when it is actually paid.

As the expenses & income booked as & when it incurred it control over the timing of Income & expenses recognition. It does not take into account the expenses & income on accrual basis. It booked the expenses & income when it received in the hands of the enterprise.

In the case of "Advance Payment " the enterprise can deferred the treatment of tax on such advance to the next year when it is received fully against the Income. The section provides the previlages to the taxpayer whos books are provided on accrual basis to defer the tax on advance payment. For example advance payment of tax on i) Royalty, ii)computer software, iii) in case of intellactual property, iv) Some Gurantee & Warantee contracts.