Question

The cash method of accounting has all of the following shortcomings except:

	A.	It is costly to administer.
	B.	It is not in accordance with generally accepted accounting principles.
	C.	Income may not be matched with related expenses.
	D.	Income and deductions may be mismatched when a transaction involves one taxpayer using the cash method and another taxpayer using an accrual method.

Answer 1

Cash basis of Accounting means an income or an expense is recognised only when cash is received or paid.

Now, generally accepted accounting principles recommend accrual basis of accounting. Hence, cash basis is not in accordance with Generally accepted accounting principles.

Also, it is possible that income may not match with the related expenses because it is possible that cash might have been paid for the expenses but not received for income and vice versa.

Also, incomes and deductions may mismatch because is is possible that one taxpayer following accrual basis has recognised the revenue on accrual basis but the other taxpayer following cash basis has not recogonised the Expense since he hasn't paid cash for them yet.

All these given above were shortcomings of cash system.

But one benefit of cash system is that it is cheaper than accrual system since generally taxpayer need not employ an accountant for Accounting. He can do it himself also.

So, statement that cash method is costly to administer is FALSE.

Hence, cash method has all the given shortcomings but it isn't costly to administer.

Hence, the correct answer is A. It is costly to administer.