Bookkeeping

Basis of Accounting
The basis of accounting describes when and how financial activities are recognized and reported. It describes when and how assets, liabilities, equity, revenues, and expenses are recognized and reported in the financial statements.

Selecting a Basis of Accounting
Selecting the most appropriate basis of accounting is important from a cost-effective standpoint since it reduces the effort required to prepare financial statements and tax returns.

Three of the more important considerations in choosing the basis of accounting are:

Keeping the Number of Adjusting Journal Entries at a Minimum
Preparing adjusting journal entries takes additional time. If the basis of accounting selected requires a significant number of monthly adjusting journal entries. For example, to convert the general ledger information from the accrual basis of accounting to the tax basis for tax reporting, it becomes more difficult to provide bookkeeping services efficiently.

Providing Businesses with Useful Information
Employers and clients need financial information to assist them in making business decisions. The bookkeeper should carefully consider the employer’s or client's financial needs before selecting a basis of accounting. For example, certain nonprofit organizations closely monitor cash receipts and disbursements. Therefore, cash basis of accounting financial statements may be more useful than accrual basis statements.

Can the Same Basis of Accounting Be Used for Both Tax and Financial Reporting?
Generally, small to medium-sized businesses can use the same basis of accounting for the general ledger and for tax and financial reporting, particularly if the basic financial statements are supplemented with schedules that provide information on significant accrual basis items, such as accounts receivable. If the same basis of accounting is used, few, if any, adjustments will be necessary to prepare financial statements and tax returns from general ledger information.

The most common basis of accounting methods include:

• Accrual or GAAP (Generally Accepted Accounting Principles)
• Cash
• Modified accrual or cash
• Tax

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