Cash Versus Accrual Accounting: Tax Policy Considerations [April 24, 2015]   [open pdf - 286KB]

"Two methods of accounting are generally available to businesses: cash basis and accrual basis accounting. Under cash basis accounting, revenue and expenses are recognized and recorded when cash is actually paid or received. Under accrual basis accounting, revenue is recorded when it is earned and expenses are reported when they are incurred, regardless of when payment is actually made or received. On the one hand, the cash basis method is simpler and arguably less administratively burdensome on businesses. On the other hand, cash accounting may result in a less accurate measure of economic income and allow for a deferral of tax liability. The Joint Committee on Taxation (JCT) considers cash accounting a departure from 'normal income tax law' and thus classifies it as a tax expenditure. Current tax law requires that most companies with average gross receipts in excess of $5 million use the accrual basis of accounting. Some companies are allowed to use either the cash or accrual basis methods of accounting for tax purposes. […] This report provides a brief explanation of cash and accrual accounting. It then examines the legislative history surrounding the Tax Reform Act of 1986 (P.L. 99-514), which set most of the current policies related to cash accounting for tax purposes. It also discusses recent policy proposals to change accounting requirements for tax purposes. The report concludes by discussing a number of policy considerations Congress may find useful."

Report Number:
CRS Report for Congress, R44002
Public Domain
Retrieved From:
National Agricultural Law Center: http://nationalaglawcenter.org/
Media Type:
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