What is Cash Basis Accounting?

The cash basis accounting system, also called cash-basis financial accounting, cash-basis method of bookkeeping or cash basis accounting records income as the difference between cash received and cash paid for purchases made, and liabilities as the difference between liabilities paid for and liabilities received. There are no profit or loss entries made in the cash basis financial accounting system, nor any other statement of financial position. The Cash Basis Accounting system was created by the United States government to replace the traditional method of bookkeeping.

The first use of the cash basis accounting system in the United States was in the courts. In the 1920s, Congress required every U.S. tax preparer to use the cash basis method. This method is used by most large tax preparers today. As a result of this requirement, most U.S. taxpayers are familiar with the cash basis method when filing their taxes.

Financial information must be presented in a manner that allows a taxpayer to obtain accurate information from the financial statements. The information cannot include estimates, projections or future values. Financial statements are required to include current and future values. Financial statements are also required to be prepared in the same language as the taxpayer uses. This is done by the use of an interpreter, or other qualified translator. If the taxpayer does not understand the information, the interpreter cannot provide the correct interpretation. An experienced taxpayer can provide a qualified interpretation to help a taxpayer to understand the information that is presented to him or her.

The taxpayer must understand what is reported on the financial statements before he or she can make informed decisions about his or her tax liability. Most financial statements are prepared based on assumptions and not fact. The taxpayer is responsible for the evaluation of his or her financial data, which is then used by the accountant to prepare the financial reports. Visit Accrual Accounting  for more ideas.

In many cases, the auditor will perform a review of the financial records prior to performing a tax audit of a taxpayer. The auditor is looking for problems that are apparent at the time of the audit. The auditor can review financial data from a tax return, but he or she cannot review the data at any other time. As a result, the auditor must rely on the taxpayer's understanding and judgment about his or her financial information.

If the accountant finds information that is incorrect, or if the taxpayer's statements are inconsistent with his or her financial information, the accountant must provide a correction to the taxpayer. A taxpayer can file a petition for a penalty tax audit.

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