2RUNNING HEAD: Tax 650 Milestone TwoThis project addresses the following critical elements of the difference between the cash method and the accrual method, how each show the recognition of revenue and expenses, the financial impact on Mr. Jones new business and how the accounting methods relate to the business.Differentiate between accrual accounting and cash basis. Based on the type of business and the client’s accounting system, what is the
3RUNNING HEAD: Tax 650 Milestone Twoimpact when revenue is recognized? Which option would you recommend for the client?The main difference between the cash method and the accrual method is when and how transactions are reported. The case method requires the taxpayer to report revenue when cash is received, and the expenses are reported when cash is paid out for them. The accrual method requires the taxpayer to record revenue when they earn the income, whether they receive the income yet and record the expenses when they occur not when payments are made. This is done to match revenue and expenses in the same period or periods.I would recommend that Bob use the accrual method in his business. Since Bob wants to open a used car dealership, which has inventory and under Treasury Regulation 1.471-1 and IRC 1.446-1 must use the accrual method. Also, I believe that the accrual method would show a clearer picture of his revenue and expenses for each period.