Question

A. Differentiate between accrual accounting and cash basis. Based on the type of business and the client’s accounting system, what is the impact when revenue is recognized? Which option would you recommend for the client?

B. Based on the decision of accrual vs. cash basis, describe when revenue would be recognized on the sale of inventory, and how the accrual reporting differs from cash basis.

C. Determine the economic impact on the client’s financial situation. Based on your decision, determine the potential tax liability, keeping in mind appropriate Internal Revenue Code and Treasury regulations.

D. Summarize the cash or accrual accounting method in relation to the selected business entity.

Answer 1

A. Accrual concept of accounting records the transaction or recognises the transaction as and when it is accrued. When it comes to cash basis the revenue is recognized only upon the receipt of cash from the customers or clients. If the client follows accrual system of accounting, he has to even.pay taxes on the amount which is accrued but cash is not received which might be at time's not a good practice and in cash basis he will pay the taxes on the actual total amount received and in this case there will be no loss to the owner.

I personally would recommend cash basis of accounting to be followed by my clients because there is no scope of uncertainty of receipt of cash in cash basis unlike the situation in accrual basis which I feel is good and I even prefer the same.

B.When it comes to sales transactioms , in accrual basis , the sale of inventory is recognized as and soon the transaction takes place irrelevant of receipt of cash and in cash basis, the sale is recognized only when the customer pays the amount involved in the transactiothe

C. The system of accounting followed by a client will definitely have an impact on the his financial system . While following accrual basis as discussed earlier , he have to pay taxes on even the amount which is not yet received and only on the assumption that he will receive it on a future date and if the client fails to pay him the amount , he have to bear the expense or loss and if such things happen in large transactions, the entity will definitely face huge losses which is not good and will also bring down the economic status of the company.

D. Note:- Here, ive not selected any specific entity and also any information regarding a specific entity is not available and hence, I would like to give the answer in general or practical state.

If the scale of operations are very large and if the owner is sure that all his customers will not fail to pay him cash on later date, he can follow accrual basis of accounting, if the owner is not sire regarding the receipt of payment or if he is not interested in.taking the risk, he should adopt cash basis of accounting.

In my personal opinion , I would suggest to adopt cash basis of accounting to the maximum possible extent.