While researching the methods of cash basis versus accrual basis of accounting within The Michele Corporation to determine on which one would work better for the Corporation. By discussing the advantages and disadvantages of both methods will give The Michele Corporation a better understanding of which method would work the best for the business. In defining, the Constructive Receipt role within the corporation and how it pertains to The Michele Corporation. Cash basis and Accrual basis methods will both be considered for this corporation so that a decision about the corporations standing.
The cash method of the Michele Corporation happens when the sales are recorded when they are paid. About the only time, a business can record cash when passed through the hands of the business owner or it is an expense. Unlike the accrual basis in which the credits are recorded instead of when the cash was received. The debits of the business are owed instead of when they are paid by the company. By using, the cash accounting method simplifies the Michele Corporation, which allows the Michele Corporation to reduce the bookkeeping costs, and takes less time than the accrual method of accounting. The cash basis accounting allows the Michele Corporation to determine their current profitability by keeping the balance sheet so that the business owner can assess the information concerning the financial situation of the Michele Corporation. The Michele Corporation’s advantage to using the cash is that the corporation would not have to pay taxes on the monies that have not been received by the corporation. According to Jones R and Pendlebury (2000, p. 143), cash-based accounting is a major accounting method that recognizes revenues and expenses at the time physical cash received or paid out, and justified on the grounds that the government budgetary, and control process is an annual.
One of the disadvantages of the cash method is that for small businesses and individuals the cash flows could be restricted during certain times. This is something that would to be looked at during this research process. In the first place, the receipt of non-cash forms of payment creates revenue equal to the value of the payment (Jones, 2011). Many companies that deal with cash business from consumers the cash basis of accounting would be simply better and convenient along with reliability for the corporation. Unlike accrual basis, “income and expenses are recorded when they occur in a fiscal period instead of when the company receives or pays cash.” (Horngren, 2008. p. 687). The Michele Corporation would be able to track expenses and cash, which would not require a bookkeeper. Another disadvantage of the cash method is that if records are not kept the company may not make their payments in a timely fashion because they will not know what they have made if the transactions are not kept in order or written down in a journal or ledger. Because the cash method could be manipulated to defer income and accelerate deductions, the tax law limits its use by large corporations (Jones, 2011).
The accrual method within the Michele Corporation refers to the basic rules or guidelines that the business keeps their financial records. A corporation has to have pristine records so that all monies are accounted for within the corporation. The Michele Corporation has to decide which one of the methods would work for this situation. By understanding, both the cash and accrual methods of accounting will allow The Michele Corporation to see which one would work better for the business, Depending on the type of legal methods, the small business has to decide whether they will extend credit to customers or pay the tax on the cash that The Michele Corporation brings in.
According to generally accepted accounting principles (GAAP), only the accrual method of accounting correctly measures annual income (Jones, 2011). The accrual method within The Michele Corporation has some advantages. One of the advantages of the accrual method is that the financial information about the corporation can be recorded as the transactions occur not when the cash received from the consumer. The accrual basis method of accounting allows the corporation to prepare the financial statements so that they can view at any time to see where the financial standing is within the corporation. Furthermore, the accrual method does not take into consideration whether the corporation has paid the bills or not.
One of the disadvantages of the accrual method for accounting is that it is complicated and rather expensive for The Michele Corporation. The cost to implement and employ the accrual method for The Michele Corporation is expensive compared to the cash method in accounting. Another disadvantage in using the accrual basis method for The Michele Corporation would result in the corporation may owe taxes on the income before the corporation receives that income. With the “cash basis this is used for smaller companies when they record revenue after they receive the cash and pay out cash, that can be tremendously misleading for the financial statements” (Weygandt, 2008).
Constructive receipt is applied to an account when the income is credited to the taxpayer’s account. This means that when The Michele Corporation receives credited income allows the taxpayer to draw on the income during the taxable year. If the payment is received and not cashed or lost The Michele Corporation would still have to claim it as income because it would be a restriction composed on The Michele Corporation. Having a business requires understanding on how accounting works within the business. By having, a clear understanding the owners can see the financial standing of the corporation. If the corporation sees that there are items that need to be taken away or are not needed anymore, the corporation should dispose to reduce the cost of the corporation.
By keeping informed about the corporation’s net present value, will help to determine if the new retail store will make it. Depending on the information that is found within the research by determining the net present value of how the corporation’s financial standings are at the end of the fiscal year. This is information that must be made available to the corporation. On the cash basis records are not required but should be kept to account for the money that he or she has made.
In conclusion, the cash and accrual methods both have some advantages and disadvantages concerning business. The Michele Corporation needs to decide which methods would work better for the business. Funnell W and Cooper K (1998 pg 129), the difference between accrual basis accounting and cash basis accounting revenues and expenses are recorded. In my opinion, I would have to say that the recommendation would have to be the cash basis method because the
Jones, S. M., & Rhoades-Catanach, S. C. (2011). Principles of taxation for business and investment planning: 2011 edition (14th ed.). New York, NY: McGraw-Hill/Irwin.
Harrington, S. E., Niehaus, G.R. (2004). Risk and Its Management The McGraw-Hill Companies, Inc.
Jones R and Pendlebury (2000) Public sector accounting 5th edition, Pearson Education, Essex, chapter 8.
Funnell W and Cooper K (1998) Public sector accounting and accountability in Australia UNSW Press, Sydney, pp. 117-149.
Horngren, C. T. (2008). Introduction to Management Accounting (14 ed.). Upper Saddle River, NJ: Prentice Hall.
Weygandt, Jerry J., Kimmel, Paul D., & Kieso, Donald E. (2008). “Financial Accounting” (6th ed.). Hoboken, NJ: Wiley. Retrieved June 20, 2011 from eBook of University of Phoenix.