What are the tax implications in the U.S. for doing ones accounting on the cash method versus the accrual method? As I understand it the main difference is in the timing (i.e. which period) of realizing income and expenses. So beyond potentially having more flexibility with an accrual basis, are there specific tax benefits/gotchas/rules for using that method?

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    With accrual basis you pay tax on income when its incurred, not paid, so there's less flexibility, not more. With cash-basis you only pay tax on the actual cash received, you don't pay taxes on money not yet paid to you. – littleadv Mar 16 '12 at 20:16
  • In India, Cash basis is not permitted for other than non-profit. It has to be accrual system. – Natwar Lath Mar 18 '12 at 15:02
  • littleadv, I see what you're saying. So under accrual-basis wouldn't you have the converse situation of being able to incure an expense without actually ponying up the cash? Also, does "incurred" mean when you receive a check or when you deposit it or when the bank actually makes funds available (assuming a cash-basis context)? – MSlimmer Mar 18 '12 at 20:16
  • @NatwarLath It is very interesting that India requires accrual basis for almost everybody. In the US, the default seems to be cash basis for individuals, though there presumably are some that use an accrual basis. Also, I believe that the Internal Revenue Service has to be informed when switching from one basis to the other. – Dilip Sarwate Jul 26 '12 at 2:37

In an accural basis, the date of invoice [or expected payment date, if giving a grace] is taken as the date when the payment was received. Similarly on the expense side, the date when the payment was due is taken as expense. So your profit and loss is on this basis.

On the other hand, on cash basis, if when you receive the funds. By this it means when it is available to you in the Bank account

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