Month: March 2015

Unlike Generally Accepted Accounting Principles(GAAP), tax accounting is an extensive set of laws and regulations required of businesses to submit income tax information. Just like federal income tax, this set of comprehensive accounting principles is regulated at the national level.

As of the 2008 fiscal year, there are only a few different ways to compile tax accounting information, but 2 main methods. The acceptable ways of submitting information are the cash method, accrual method, or a combination of both.

Depending on qualification, these different methods can be chosen by a company according to timing of transactions such as credits and debits. If qualified for either method, the company will look at the advantages and disadvantages of each method and choose the most beneficial method. The American Institute of Certified Public Accountants(AICPA) submitted a request to change the accounting method, but nothing has been overturned as of yet.

There are two parameters that a business must not qualify for to have the ability to choose their tax accounting method . A business must use the accrual method if the sales are over $5 million or there is inventory stockpiled that will either be sold to the public or used to make products sold to the public.

The accrual method, or accrual basis, of tax accounting records sales and purchases as the order is processed. In this method, physically receiving or paying money is not the time of recording. When a sale is made or a job is completed the credits or debits are recorded, regardless of the money actually changing hands or not. This method is simpler when large contracts are signed, but the payment plan may last several years. One disadvantage would be that even though the books show a large capital, the actual funds are not in the account.

The cash method, or cash basis, of tax accounting is simply recording transactions as the money is exchanged. This method is more accurate and gives a better feel for how much spendable capital a business has to use. Depending on the set-up of the business procedure, the cash method takes a little more discipline in book keeping. Unlike the accrual method that records the transaction as the order is processed in the office, in cash accounting the payment must be recorded directly after payment is taken. The cash method can also leave a window for fraud or theft, whereas accrual accounting has checks and balances to make sure the correct amount of payment is applied for each order.

So, after determining if your business is required to use the accrual method or not, it has a choice. The choice depends on the structure of the business and the preferences of advantages and disadvantages of each method.

It is important to note that a business is not allowed to change tax accounting methods back and forth. If a change is desired, the current method must have been used for the last two consecutive years. At that time, a formal request must be submitted to the Secretary of the Treasury. To make sure this process is done correctly and all the bases are covered, the owner/officer of the business should consult with a certified public accountant. The Secretary of the Treasury also has the right to require a business to re-compute the taxable income to more accurately show a business’s tax accounting.

In summary, tax accounting requires careful analysis and application of the tax code, regulation provisions, administrative pronouncements, and case law. It is possible and sometimes more advantageous to complete this process in-house or with the aid of online accounting , but it is recommended for some businesses to seek professional guidance.

Accounting is a subject that differs from others its chapters are often interlinked. Failure to master the early chapters would make learning subsequent chapters even more difficult. If you are struggling with accounting, its likely you have not mastered the foundation well. The best way is to relearn the basics from scratch from a qualified teacher.

4 Tips for Mastering Accounting

1. Understand the technical terms – Learning accounting is like trying to live in a foreign country. The first thing is to understand the alphabets, the language and how terms are defined in the foreign world. Take some time to understand the new technical terms in accounting. Often, the same terms used in accounting are different from ordinary usage. Be sure to clarify them quickly with your lecturer or tutor.

2. Master the nature of the accounts – Accounts can be classified as either debit nature or credit nature. Beginner students often think debit increases and credit decreases. This is only true if the account is debit nature. A credit nature account increases by crediting, and decreases by debiting. All accounts have a nature, be sure to memorize the nature of the major categories of accounts before proceeding to learn double entry. Not knowing the nature of the accounts is like not knowing the ABCs.

3. Master Double Entry Seek a good instructor and good books to master double entry. Students who fail to master double entry will find tremendous difficulty in grasping future concepts as double entry is a pre-requisite to understanding future chapters such as correction of errors, depreciation and Provision for doubtful debts.

4. Practice diligently Accounting is a hands on subjects like maths, there must be sufficient practice time devoted to test and develop an understanding of the accounting concepts.

Follow these 4 tips and you will be on track to mastering the subject!