Cash basis method vs. accrual basis method of accounting and its applications in the manufacturing businesses

Purpose: It was the purpose of this study to clarify the differences between the cash basis method and the accrual method of accounting and its applications for tax purposes in the various manufacturing businesses in the United States of America. Method: This investigation was done largely through research in the Estill Library, and questionaries to leading manufacturing businesses. References consisted of (1) law itself, (2) articles written by experts attempting to interpret the law, and (3) the Commerce Clearing House Tax Reporter and related material. Findings: It is recognized that no uniform method of accounting can be prescribed to all taxpayers. Each taxpayer shall adopt such forms and systems as are, in his judgement, best suited to his needs. However, no method of accounting is acceptable unless, in the opinion of the Commissioner, it clearly reflects income. But where inventories are necessary to compute income, an accrual method must be used for purchases and sales, unless the Commissioner authorizes another method which clearly reflects income. Use of cash basis, generally means the use of a hybrid system, with sales, purchases, depreciation, and bad debts being reported as on the accrual basis, but with the remaining income and expense items being measured on a cash basis without regard to accrued and prepaid items. The cash basis offers certain advantages in the form of simpler more economical bookkeeping.