Question

Which of the following is true of the cash method of accounting?

It's only available to C corporations with sales over $5 million.

A sale is entered into the books when the invoice is generated.

You pay taxes on revenue before you actually receive it.

Recording of income can be put off until the next tax year when the income is actually received.

Answer 1

Recording of the income can be put off until next year when the income is actually received.

In the cash method of accounting, you record expenses when they are paid and revenue when it is received.

Answer 2

Recording of income can be put off until the next tax year when the income is actually received.

Step-by-step explanation:

The cash method of accounting is simply to record revenue when it is actually received, i.e. when the company gets paid, and record expenses when they are actually paid by the company.

If a company sells a lot of products on credit, it will have a lot of accounts receivable, or purchases a lot of inputs on credit, it will have a lot of accounts payable. Cash inflows or outflows are all that matters.

This actually postpones sales recognition (and corresponding taxes) until the cash is received.