Cash-basis Tax Reporting

While accrual-basis reporting provides the most effective method for analyzing profitability and other management results, many enterprises pay taxes on a cash basis. You may want to produce cash-basis reports for income tax purposes and simultaneously maintain accrual-basis reports for management control.

Taxable income is calculated as the difference between cash receipts from revenues and cash payments for expenses.

• If the cash-basis method is used, the tax amount paid is calculated based only on cash that has been received.
• If the accrual method is used, the tax amount paid is based on revenue earned, regardless of whether cash has been received.

The basic principle behind the tax reporting conversion is that accounts receivable, unbilled services, and accounts payable at the beginning of the fiscal year or accounting period are:

• Turned into cash transactions during the year or accounting period, or
• Remain reflected as accounts receivable, unbilled services, or accounts payable at the end of the year or accounting period.

The amounts by which these accounts change are the amounts needed to convert from the accrual basis to the cash basis.