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    Select accrual or cash basis accounting for new business

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    You have been assigned to consult a new business startup. Should they use accrual or cash basis accounting? Explain your choice.

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    Solution Preview

    It very much depends on a variety of factors including the following:

    1. Some entities are required to use accrual accounting including those with inventories. The matching concept would not allow companies to expense their inventories at the purchase date. Inventory purchases cannot be expensed until they are sold.

    2. Service businesses tend to use the cash basis of accounting because the owners are not interested in paying tax on accounts receivable. Many service businesses have no guarantee that they will collect 100% of their receivables. Even if most are collected, there is a lag time of 60-120 days for collection. If these types of entities were ...

    Solution Summary

    In a 444 word response, the solution explains six issues relating to the selection of an accounting method, and how each will affect their ability to do business effectively.