Cash basis accounting is one of two methods being used to record business transactions and many prefer this over the accrual method because it is less complicated. However, is it really? Test yourself to find out if you can figure out problems using cash accounting terminology.
The cash basis method of recording is widely used by start-up entrepreneurs and small-scale businesses that deal mostly on cash-based operations. Although popular, it’s not the most recommended method of recording business transactions particularly among corporate organizations.
There are notions that the cash method is simple but not too many are aware that the Internal Revenue Service (IRS) requires certain modifications in its use. IRS examiners find understatements or overstatements in most cash-based financial reports and all these often lead to tax complications.
On the other hand, the Securities and Exchange Commission requires corporate organizations to strictly comply with the GAAP rules, and this requirement cannot be satisfied if the company uses the cash accounting system.
Test your mettle and at the same time find out the most common situational issues posed by cash accounting by tackling these problem-solving questions.
Cash Accounting Quiz
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References
- IRS Publication 538 - Main Contents / Accounting Methods-Cash http://www.irs.gov/publications/p538/ar02.html#d0e1136
